Asset Pricing with Free Entry and Exit of Firms

Lorant Kaszab, Aleš Maršál and Katrin Rabitsch

No 2022/5, MNB Working Papers from Magyar Nemzeti Bank (Central Bank of Hungary)

Abstract: We study the asset-pricing implications of changes in the variety of consumption goods which happens through free entry and exit of firms. Fluctuations in varieties drive a wedge between the measured and model-based (including variety growth) consumer price index making the pricing kernel as well as asset prices more volatile without driving up the volatility of consumption growth. Different from earlier endowment economy models of variety growth our model contains production which i) generates the correlations important for the explanation of the high mean and volatility of equity premium endogenously, and ii) leads to an increase of about 140 basis points in the risk-premia relative to the endowment model.

Keywords: free entry and exit of firms; New Keynesian; asset pricing; equity premium (search for similar items in EconPapers)
JEL-codes: E32 E60 G12 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2022
New Economics Papers: this item is included in nep-mac
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https://www.mnb.hu/letoltes/mnb-wp-2022-5-final.pdf (application/pdf)

Related works:
Journal Article: Asset pricing with free entry and exit of firms (2022)
Working Paper: Asset Pricing with Free Entry and Exit of Firms (2022)
Working Paper: Asset Pricing with Free Entry and Exit of Firms (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:mnb:wpaper:2022/5

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