Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle
This paper studies a DSGE model with endogenous financial asset supply and ambiguity averse investors. An increase in uncertainty about profits leads firms to substitute away from debt and reduce shareholder payout in bad times when the equity premium is high. Regime shifts in volatility generate large low frequency movements in asset prices due to uncertainty premia that are disconnected from the business cycle.
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Document Object Identifier (DOI): 10.3386/w20081
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