Uncertainty Shocks, Asset Supply and Pricing Over the Business Cycle

63 Pages Posted: 6 May 2014 Last revised: 15 May 2023

See all articles by Francesco Bianchi

Francesco Bianchi

Johns Hopkins University; NBER; CEPR

Cosmin L. Ilut

Duke University

Martin Schneider

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: May 2014

Abstract

This paper estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors. Firms' shareholders choose not only production and investment, but also capital structure and payout policy subject to financial frictions. An increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout. This mechanism parsimoniously accounts for postwar comovement in investment, stock prices, leverage and payout, at both business cycle and medium term cycle frequencies. Ambiguity aversion permits a Markov-Switching VAR representation of the model, while preserving the effect of uncertainty shocks on the time variation in the equity premium.

Suggested Citation

Bianchi, Francesco and Ilut, Cosmin L. and Schneider, Martin, Uncertainty Shocks, Asset Supply and Pricing Over the Business Cycle (May 2014). NBER Working Paper No. w20081, Available at SSRN: https://ssrn.com/abstract=2432825

Francesco Bianchi (Contact Author)

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States
14127156283 (Phone)

NBER ( email )

1050 Massachusetts Avenue
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CEPR ( email )

London
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Cosmin L. Ilut

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
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HOME PAGE: http://econ.duke.edu/~cli2/index.html

Martin Schneider

Stanford University ( email )

Stanford, CA 94305
United States

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