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Asset pricing with costly and delayed firm entry

Published online by Cambridge University Press:  19 July 2023

Lorant Kaszab Open the ORCID record for Lorant Kaszab [Opens in a new window] ,
Ales Marsal  and
Katrin Rabitsch
Lorant Kaszab*
Affiliation:
Central Bank of Hungary, Budapest, Hungary
Ales Marsal
Affiliation:
National Bank of Slovakia, Bratislava, Slovakia Mendel University in Brno, Brno, Czech Republic
Katrin Rabitsch
Affiliation:
Vienna University of Economics and Business, Wien, Austria
*
Corresponding author: Lorant Kaszab; Email: kaszabl@mnb.hu
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Abstract

Survey evidence tells us that stock prices reflect the risks investors associate with long-run technological change. However, there is a shortage of models that can rationalize long-run risks. Unlike the previous literature assuming a fixed number of products, our model allows for new product varieties that appear in the form of new firms which face entry costs and delay in the entry process. The fixed variety model has a significant limitation in translating macroeconomic volatility into asset return volatility. Our model with growing varieties induces endogenous low-frequency fluctuations in productivity driving large, persistent variations in consumption growth and asset prices. It also changes the valuation of assets through the increase in the volatility of the pricing kernel (with a positive long-run component) and leads to higher excess returns. Our model is motivated by a simple recursively identified VAR model containing quarterly US data 1992Q3-2018Q4 with the following list of variables: total factor productivity, output, a measure of firm entry, and the excess return on stocks.

Keywords

Firm entryequity premiumEpstein-ZinNew Keynesianvector autoregressionmacro-finance
Type
Articles
Information
Macroeconomic Dynamics , First View , pp. 1 - 25
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

*

We are grateful to the editor, associate editor, two referees, participants at NOEG 2020, Dynare 2019, CEF 2018, EcoMod 2018, ICMAIF 2018, MMF 2017 conferences, Cardiff Business School, Hungarian Economics Society, Banco de Mexico and Central Bank of Hungary. Special thanks to Martin Andreasen, Gianluca Benigno, Tamas Briglevics, Alessia Campolmi, Michael Donadelli, Peter Gabriel, Max Gillman, Patrick Grüning, Henrik Kucsera, Robert Lieli, Lorenzo Menna, Patrick Minford, Victoria Nuguer, Panayiotis Pourpurides, Eyno Rots, Anthony Savagar, David Staines, Balazs Vilagi, Abraham Vella, and Mike Wickens for comments. We gratefully acknowledge support from the Jubilaeumsfonds of the Austrian National Bank (no. 17791). Ales acknowledges support from the Grant Agency of the Czech Republic number 22-34451S.

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