Asset prices and business cycles with costly external finance |
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Authors: | Joao F Gomes Amir Yaron Lu Zhang |
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Institution: | a Finance Department, The Wharton School, University of Pennsylvania, Philadelphia, PA 19104, USA;b William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY 14627, USA;c CEPR, UK;d NBER, USA |
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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. However, we also show that these results require a procyclical financing premium, a property that seems at odds with the data. |
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