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Asset Pricing in Production Economies When Capital Inputs are Heterogeneous

66 Pages Posted: 14 Oct 2016  

Nicole Branger

University of Muenster - Finance Center Muenster

Nikolai Gräber

University of Muenster - Finance Center Muenster

Malte Schumacher

University of Zurich - Department of Business Administration

Date Written: October 13, 2016

Abstract

This paper studies asset pricing implications of heterogeneity across capital inputs. We build a general equilibrium model including two types of capital. The agents in our economy have Epstein and Zin (1989) preferences and technology is exposed to long-run risks in productivity growth. Following the literature, production inputs differ with respect to rates of depreciation and adjustment cost. We explain both, differences in returns and investment behaviour for two types of capital. Model implied asset pricing and relevant macroeconomic moments are in line with empirical data. To fully capture the effect of small but persistent shocks to the expected growth rate of productivity in a DSGE framework, the model is solved with a global non-linear solution algorithm. It is shown, when including long-run risks in productivity growth in conjunction with capital heterogeneity, using local Taylor-expansion based methods will not suffice, to obtain a satisfactory accuracy of approximation.

Keywords: Heterogeneous assets, production economy, long-run risks

JEL Classification: D24, D51, G12

Suggested Citation

Branger, Nicole and Gräber, Nikolai and Schumacher, Malte, Asset Pricing in Production Economies When Capital Inputs are Heterogeneous (October 13, 2016). Available at SSRN: https://ssrn.com/abstract=2851792 or http://dx.doi.org/10.2139/ssrn.2851792

Nicole Branger

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Nikolai Gräber

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

Malte Schumacher (Contact Author)

University of Zurich - Department of Business Administration ( email )

Rämistrasse 71
Zurich, CH-8006
Switzerland

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