Research

Abstract

The paper explains the cash flow risk and the behavior of equity term structure dynamics using a general equilibrium model. I propose a novel explanation for the cash flow risk that correctly captures the decomposition of forward yields into expected dividend growth and risk premium components, in addition to explaining the upward sloping term structure in expansions and its inversion in recessions. In the model the asset prices react instantly to the aggregate shock in the economy (financial effect) but the real effect of the shock is delayed: cash flows are still increasing or flat at the moment negative shock hits the economy due to the firms selling their capital and distributing proceeds from sale as dividends both because capital is less productive and because households highly value dividends in bad times. Furthermore, the economic mechanism behind the endogenous cash flow process and the discount rate risk is micro-founded with the heterogeneous firm model matched to the firm-level data for the US.

Cross sectional contribution: Given the richness of the heterogeneous firm model, we also explain the economic mechanism behind the value premium (as the risk premium between the long and short duration firms) and the forward yield decomposition across firms of different duration.

Abstract

The decrease in competition, the increase in common ownership and the rise of inequality are well documented but still no paper has related common ownership to inequality. This paper provides empirical evidence from structural estimation that common ownership contributes to the increase in income inequality through declining competition given the common ownership hypothesis is true; we propose and try to give quantitative answers to the following questions: 1) What percent of the increase in the share of profits (increase in markups) in the last 3 decades is due to the increase in common ownership? 2) What part of the increase in income inequality was due to common ownership? According to our model, that relies on common ownership hypothesis, the rise of common ownership contributed to an increase in markups from 1.09 to 1.58, and to an increase in total income Gini coefficient from 27.62 to 41.73.

Abstract

The paper examines the stochastic behavior of equilibrium asset prices in a two-asset, pure exchange economy with two different agents: One agent is a wishful thinker, as defined in Caplin, Leahy (2019), and the other one is a rational agent. The objective of this paper is to understand how the aggregate response of wishful thinkers and rational agents to the exogenously determined productivity changes is shaping the price of a risky asset.