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Asset Prices and Business Cycles with Costly External Finance

Author

Listed:
  • Joao Gomes
  • Amir Yaron
  • Lu Zhang
Abstract
This paper asks whether the asset pricing fluctuations induced by the presence of costly external finance are empirically plausible. To accomplish this, we incorporate costly external finance into a dynamic stochastic general equilibrium model and explore its implications for the properties of the returns on key financial assets, such as stocks, bonds and risky loans. We find that the mean and volatility of the equity premium, although small, are significantly higher than those in comparable adjustment cost models. However, we also show that these results require a procyclical financing premium, a property that seems at odds with the data.

Suggested Citation

  • Joao Gomes & Amir Yaron & Lu Zhang, 2002. "Asset Prices and Business Cycles with Costly External Finance," NBER Working Papers 9364, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9364
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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