A parsimonious macroeconomic model for asset pricing

By Fatih Guvenen. 2009

412 citations recorded by the source corpus.

In this paper, I study asset prices in a two-agent macroeconomic model with two key features: limited participation in the stock market and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices that have been documented in the literature, such as a high equity premium; relatively smooth interest rates; procyclical variation in stock prices; and countercyclical variation in the equity premium, in its volatility, and in the Sharpe ratio. While the model also reproduces the long-horizon predictability of the equity premium, the extent of predictability is smaller than in the data. In this model, the risk-free asset market plays a central role by allowing the non-stockholders (who have low EIS) to smooth the fluctuations in their labor income. This process concentrates nonstockholders' aggregate labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the US data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. Finally, when it comes to business cycle performance the model's progress has been more limited: consumption is still too volatile compared to the US data, whereas investment is still too smooth. These are important areas for potential improvement in this framework.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/660cc6b05f35e3abb25565a48443c2f94bcad9f9

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Citations in the corpus

Firm-Level Productivity, Risk, and Return (2014, neutral): “…Huang, and Santos (2001) from loss aversion; in Constantinides and Duffi e (1996) from time varying cross sectional distribution of labor income; in Guvenen (2009) from limited participation; in Bansal and Yaron (2004) from time varying economic uncertainty; and in Piazzesi, Schneider, and…”
Inequality, stock market participation, and the equity premium (2013, positive): “An alternative is simply to forbid certain households from holding equity, as in Basak and Cuoco (1998), Guvenen (2009), Guo (2004), and Walentin (2010) among others.”
Asset Prices with Heterogeneity in Preferences and Beliefs (2014, neutral): “For example, Guvenen (2009), studies asset pricing in a model with heterogeneity in elasticity of intertemporal substitution, Isaenko (2008) studies the term structure in a model where agents differ in both their risk aversion and elasticity of intertemporal substitution, and Gomes and Michaelides…”
Risk Premiums and Macroeconomic Dynamics in a Heterogeneous Agent Model (2008, background): “This conclusion is qualitatively similar to the results obtained by Guvenen (2008), but the IRFs clearly indicate that the size of this bond trade remains very limited in our model.”
Heterogeneity and Persistence in Returns to Wealth (2018, positive): “This is indeed consistent with an extensive literature on participation costs (surveyed in Guiso and Sodini (2013), and emphasized by Guvenen (2009) in the context of the wealth inequality debate).”
Asset Pricing in a Production Economy with Chew-Dekel Preferences (2007, neutral): “Web: http://pages.stern.nyu.edu/˜gclement”
Stock Market Returns and Consumption (2020, background): “For example, Johnson, Parker and Souleles (2006), Johnson et al. (2013), Agarwal and Qian (2014) and Jappelli and Pistaferri (2014) discuss estimates of MPC out of one-time transfers like tax rebates.”
Business Cycle Dynamics Under Rational Inattention (2015, neutral): “where Cjt is composite consumption by household j, Λ is some twice continuously differentiable function and Pt is the price index appearing in the demand function (13).”
Disasters Implied by Equity Index Options (2011, background): “Bates (2008), Chan and Kogan (2002), Guvenen (2009), Longstaff and Wang (2008), and Lustig and Van Nieuwerburgh (2005) are notable examples.”
Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy (2010, neutral): “32 32 Studies that have looked at this issue include Luttmer (1999), Mankiw and Zeldes (1991), Basak and Cuoco (1998), Attanasio, Banks and Tanner (2002), Vissing-Jorgensen (2002), Paiella (2003), Attanasio and Paiella (2006) and Guvenen (2009).”
Dynamic Quantile Models of Rational Behavior (2019, neutral): “Another body of the literature encompasses heterogeneity by allowing the parameters to vary in a small set – as a binary set, for example – (see, e.g., Mazzocco (2008), and Guvenen (2009)).”
Inventory Investment and the Cost of Capital (2013, methodology): “We take the parameters of the firm-level productivity process from Imrohoroglu and Tuzel (2011), which estimates firm production functions and generates firm-level productivity estimates using annual data.”
Financial crises, bank risk exposure and government financial policy (2012, background): “Since t does not depend on bank-specic factors, we can aggregate equation (28) to obtain a relation between the aggregate demand for securities by banks Spt and aggregate net worth in the banking sector Nt:”