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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Apr 1, 2015

Long-Run Productivity Risk: A New Hope for Production-Based Asset Pricing?


I examine the intertemporal distribution of US productivity risk and show that the conditional mean of productivity growth is an important determinant of macro quantities and asset prices. After establishing this empirical link, I rationalize it in a production economy featuring long-run productivity risk, Epstein and Zin (1989) preferences, and investment frictions. Both convex capital adjustment costs and convex reallocation costs across consumption and investment produce an annual equity premium as sizeable as in the data.

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