Uncertainty shocks, asset supply and pricing over the business cycle

Francesco Bianchi, Cosmin Ilut and Martin Schneider

No 11950, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Asset pricing; Business cycle; Dsge; Markov-switching (search for similar items in EconPapers)
JEL-codes: C32 E32 G12 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
https://cepr.org/publications/DP11950 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2018)
Working Paper: Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2014)
Working Paper: Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:11950

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP11950

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().