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Micro Frictions, Asset Pricing and Aggregate

Author

Listed:
  • Jack Favilukis
  • Xiaoji Lin
Abstract
We use asset pricing insights to study importance of micro-level frictions for aggregate quantities. In our model, the relevant stochastic variable is a stationary growth rate (necessary to produce high Sharpe Ratios in a Long Run Risk world), as opposed to a trend-stationary level of productivity. This naturally implies a heteroscedastic and timedependent aggregate investment rate; contributing to the recent debate between Khan and Thomas (2008) and Bachmann, Caballero, and Engel (2010), we find that non-convex costs are not necessary to match these moments. Our best model, combining convex and nonconvex costs, matches aggregate macro-economic and micro-level investment moments, as well as the High Sharpe Ratio of equity.

Suggested Citation

  • Jack Favilukis & Xiaoji Lin, 2011. "Micro Frictions, Asset Pricing and Aggregate," FMG Discussion Papers dp673, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp673
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/DP673_2011_MicroFrictions.pdf
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    References listed on IDEAS

    as
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    1. Eran Yashiv, 2016. "Capital Values and Job Values," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 19, pages 190-209, January.
    2. Yashiv, Eran, 2015. "Capital values and job values," LSE Research Online Documents on Economics 86323, London School of Economics and Political Science, LSE Library.

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