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Investment-Specific Shocks, Business Cycles, and Asset Prices

Author

Listed:
  • Giuliano Curatola

    (Goethe University Frankfurt)

  • Michael Donadelli

    (Goethe University Frankfurt)

  • Patrick Gruning

    (Bank of Lithuania & Faculty of Economics, Vilnius University)

  • Christoph Meinerding

    (Goethe University Frankfurt)

Abstract

This paper proposes and tests a new source of time variation in real investment opportunities, namely long-run shocks to the productivity of the investment sector, to explain the joint behavior of macroeconomic quantities and asset prices. A two-sector general equilibrium model with long-run investment shocks and wage rigidities produces both positive co-movement among key macroeconomic variables and a sizable return volatility differential between the investment and consumption sector. Moreover, positive long-run investment shocks are associated with low marginal utility and thus command a positive risk premium. We test our model using data on sectoral TFP and find evidence in support of our theoretical predictions.

Suggested Citation

  • Giuliano Curatola & Michael Donadelli & Patrick Gruning & Christoph Meinerding, 2016. "Investment-Specific Shocks, Business Cycles, and Asset Prices," Bank of Lithuania Working Paper Series 36, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:36
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    More about this item

    Keywords

    General Equilibrium Asset Pricing; Production Economy; Long-Run Risk; Investment-Specific Shocks; Wage Rigidities.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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