European Business Schools Librarian's Group
Department of Economics Working Papers,
Vienna University of Economics and Business, Department of Economics
Asset Pricing with Free Entry and Exit of Firms
Lorant Kaszab (), Ales Marsal and Katrin Rabitsch ()
Additional contact information
Lorant Kaszab: Department of Economics, Vienna University of Economics and Business, Magyar Nemzeti Bank
Ales Marsal: Department of Economics, Vienna University of Economics and Business, National Bank of Slovakia
Katrin Rabitsch: Department of Economics, Vienna University of Economics and Business
Abstract: We study the asset-pricing implications of changes in the variety of consumption goods which happens through free entry and exit of firms. Fluctuations in varieties drive a wedge between the measured and model-based (including variety growth) consumer price index making the pricing kernel as well as asset prices more volatile without driving up the volatility of consumption growth. Different from earlier endowment economy models of variety growth our model contains production which i) generates the correlations important for the explanation of the high mean and volatility of equity premium endogenously, and ii) leads to an increase of about 140 basis points in the risk-premia relative to the endowment model.
Keywords: firm entry-exit, risk premium
JEL-codes: E32; E60; G12 May 2022
Full text files
wp324.pdf
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