SAFE working paper
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388
We find that high macroeconomic uncertainty is associated with greater accumulation of physical capital, despite a reduction in investment and valuations. To reconcile this puzzling evidence, we show that uncertainty predicts lower depreciation and utilization of existing capital, which dominates the investment slowdown. Motivated by these dynamics, we develop a quantitative production-based model in which firms implement precautionary savings through reducing utilization rather than raising invest-ment. Through this novel intensive-margin mechanism, uncertainty shocks command a quarter of the equity premium in general equilibrium, while flexibility in utilization adjustments helps explain uncertainty risk exposures in the cross-section of industry returns.
11 [neue Version]
There has been a considerable debate about whether disaster models can rationalize the equity premium puzzle. This is because empirically disasters are not single extreme events, but long-lasting periods in which moderate negative consumption growth realizations cluster. Our paper proposes a novel way to explain this stylized fact. By allowing for consumption drops that can spark an economic crisis, we introduce a new economic channel that combines long-run and short-run risk. First, we document that our model can match consumption data of several countries. Second, it generates a large equity risk premium even if consumption drops are of moderate size.
216
We develop a model that reproduces the average return and volatility spread between sin and non-sin stocks. Our investors do not necessarily boycott sin companies. Rather, they are open to invest in any company while trading off dividends against ethicalness. We show that when dividends and ethicalness are complementary goods and investors are sufficiently risk averse, the model predicts that the dividend share of sin companies exhibits a positive relation with the future return and volatility spreads. Our empirical analysis supports the model's predictions.
358
Liquidity derivatives
(2022)
It is well established that investors price market liquidity risk. Yet, there exists no financial claim contingent on liquidity. We propose a contract to hedge uncertainty over future transaction costs, detailing potential buyers and sellers. Introducing liquidity derivatives in Brunnermeier and Pedersen (2009) improves financial stability by mitigating liquidity spirals. We simulate liquidity option prices for a panel of NYSE stocks spanning 2000 to 2020 by fitting a stochastic process to their bid-ask spreads. These contracts reduce the exposure to liquidity factors. Their prices provide a novel illiquidity measure refllecting cross-sectional commonalities. Finally, stock returns significantly spread along simulated prices.
11
This paper analyzes the equilibrium pricing implications of contagion risk in a Lucas-tree economy with recursive preferences and jumps. We introduce a new economic channel allowing for the possibility that endowment shocks simultaneously trigger a regime shift to a bad economic state. We document that these contagious jumps have far-reaching asset pricing implications. The risk premium for such shocks is superadditive, i.e. it is 2.5\% larger than the sum of the risk premia for pure endowment shocks and regime switches. Moreover, contagion risk reduces the risk-free rate by around 0.5\%. We also derive semiclosed-form solutions for the wealth-consumption ratio and the price-dividend ratios in an economy with two Lucas trees and analyze cross-sectional effects of contagion risk qualitatively. We find that heterogeneity among the assets with respect to contagion risk can increase risk premia disproportionately. In particular, big assets with a large exposure to contagious shocks carry significantly higher risk premia.
74
We analyze the implications of the structure of a network for asset prices in a general equilibrium model. Networks are represented via self- and mutually exciting jump processes, and the representative agent has Epstein-Zin preferences. Our approach provides a exible and tractable unifying foundation for asset pricing in networks. The model endogenously generates results in accordance with, e.g., the robust-yetfragile feature of financial networks shown in Acemoglu, Ozdaglar, and Tahbaz-Salehi (2014) and the positive centrality premium documented in Ahern (2013). We also show that models with simpler preference assumptions cannot generate all these findings simultaneously.