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Micro Frictions, Asset Pricing and Aggregate

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  • 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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    Cited by:

    1. Yashiv, Eran, 2015. "Capital values and job values," LSE Research Online Documents on Economics 86323, London School of Economics and Political Science, LSE Library.
    2. 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.
    3. 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.

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