Long-run productivity risk: A new hope for production-based asset pricing? |
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| Institution: | 1. Banco de Portugal, R. Francisco Ribeiro, 2, 1150-165 Lisboa, Portugal;2. Catolica Lisbon School of Business & Economics, Portugal;3. CEPR, United Kingdom;1. Texas Christian University, USA;2. Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, USA;1. Cheung Kong Graduate School of Business, Beijing 100738, China;2. The University of Michigan, Ross School of Business, Ann Arbor, MI 48109, United States;1. Faculty of Economics and Business Administration and Research Center SAFE, Goethe University Frankfurt, House of Finance, Theodor-W.-Adorno Platz 3, 60629 Frankfurt am Main, Germany;2. Center for Excellence in Finance and Economic Research (CEFER), Bank of Lithuania, Lithuania;3. Faculty of Economics, Vilnius University, Lithuania |
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| Abstract: | The examination of the intertemporal distribution of US productivity risk suggests that the conditional mean of productivity growth is an important determinant of macro quantities and asset prices. After establishing this empirical link, I rationalize it in a production economy featuring long-run productivity risk, Epstein and Zin (1989) preferences, and investment frictions. Both convex capital adjustment costs and convex reallocation costs across consumption and investment produce an annual equity premium as sizeable as in the data. |
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| Keywords: | Production Long-run risk Asset pricing Recursive utility |
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