Asset Prices and Business Cycles with Costly External Finance

36 Pages Posted: 6 Aug 2003

See all articles by Joao F. Gomes

Joao F. Gomes

The Wharton School

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Lu Zhang, 张橹

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: June 2003

Abstract

This Paper asks whether the asset pricing fluctuations induced by the presence of costly external finance are empirically plausible. To accomplish this, we incorporate costly external finance into a dynamic stochastic general equilibrium model and explore its implications for the properties of the returns on key financial assets, such as stocks, bonds and risky loans. We find that the mean and volatility of the equity premium, although small, are significantly higher than those in comparable adjustment cost models. We also show that these results require a procyclical-financing premium, however, a property that seems at odds with the data.

Keywords: Financial accelerator, business cycles, asset prices

JEL Classification: E22, E44, G31

Suggested Citation

Gomes, João F. and Yaron, Amir and Zhang, Lu, Asset Prices and Business Cycles with Costly External Finance (June 2003). CEPR Discussion Paper No. 3927. Available at SSRN: https://ssrn.com/abstract=431781

João F. Gomes (Contact Author)

The Wharton School ( email )

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HOME PAGE: http://fnce.wharton.upenn.edu/profile/gomesj/

Amir Yaron

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
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Philadelphia, PA 19104
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215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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