Debt, Equity and the Equity Price Puzzle
Sveriges Riksbank Working Paper Series No. 314
13 Pages Posted: 19 May 2016
Date Written: December 2015
We show that in a model with equity and debt financing, the specification of the borrowing constraint is crucial to generate empirically plausible responses of macro variables and asset prices to financial shocks. The interaction between financial frictions and labor demand, as in Jermann and Quadrini (2012), is key to the result. A collateral constraint a la Kiyotaki and Moore (1997) augmented with a working capital assumption generates similar results on impact.
Keywords: liquidity shocks, collateral constraints, stock prices, co-movement
JEL Classification: E32, E44
Suggested Citation: Suggested Citation