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Thursday, September 23 ICEF held the Research seminar.
Venue: Pokrovski Bulvar, 11, Room Zh-822
Lecturer: Jack Favilukis (LSE)
Theme: «Micro Frictions, Asset Pricing, and Aggregate Implications»
Abstract: There is a long standing debate in the macro-economics literature about the impor- tance of non-convex micro level adjustment costs for aggregate quantities. In particular, (Thomas 2002), and (Khan and Thomas 2008) argue that non-convex micro frictions are unimportant for aggregate quantities; (Bachmann, Caballero, and Engel 2010) have ar- gued that such frictions are crucial to match the heteroscedasticity and time-dependence of aggregate investment rate. However these models typically do not perform well when one considers asset pricing and the identification of micro-frictions is not clear. (This de- bate has to an extent spilled over to papers considering asset pricing, such as (Gomes, Kogan, and Zhang 2003) and (Garleanu, Panageas, and Yu 2009)). On the other hand, convex adjustment costs have been used to help match asset pricing moments in mod- els by (Jermann 1998), (Zhang 2005), (Tuzel 2010), (Croce 2010), (Kaltenbrunner and Lochstoer 2010) however little attention has been paid to micro level implications. We explore micro level frictions in a model guided by asset pricing insights: in our model the relevant stochastic variable is a stationary growth rate (as opposed to a trend-stationary level) of productivity. We use asset pricing insights to show that non-convex micro fric- tions are not necessary to match the aggregate moments, including those emphasized by Bachmann et. al. suggesting that convex costs alone are an appropriate modeling choice when considering only the aggregate. However, non-convex frictions can affect aggregate quantities for certain parameter choices, confirming the findings of Bachmann et. al. Our best model, involving a combination of convex and non-convex costs, is able to match aggre- gate macroeconomic moments, micro-level investment moments, as well as the high Sharpe Ratio of equity returns. The model also suggests that partial equilibrium insights on the value premium may not carry over to general equilibrium.
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