Work

Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle

Year: 2014

Type: report

Abstract: This paper estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors.Firms' shareholders choose not only production and investment, but also capital structure and payout policy subject to financial frictions.An increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout.This mechanism parsimoniously accounts for postwar comovement in investment, stock prices, leverage and payout, at both business cycle and medium term cycle frequencies.Ambiguity aversion permits a Markov-Switching VAR representation of the model, while preserving the effect of uncertainty shocks on the time variation in the equity premium.

Source: National Bureau of Economic Research

DOI: 10.3386/w20081

Authors: Francesco Bianchi, Cosmin Ilut, Martin Schneider

Institutions: National Bureau of Economic Research, Duke University, Cornell University, University of Chicago, Federal Reserve Bank of Boston, New York University, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Chicago, The University of Texas at Austin, Stanford University

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: National Science Foundation

OpenAlex ID: W2128559153

Cites: 103

Cited by: 65

Related to: 10