NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Asset Prices and Business Cycles with Costly External Finance

Joao Gomes, Amir Yaron, Lu Zhang

NBER Working Paper No. 9364
Issued in December 2002
NBER Program(s):   AP   EFG

This paper asks whether the asset pricing fluctuations induced by the presence of costly external finance are empirically plausible. To accomplish this, we incorporate costly external finance into a dynamic stochastic general equilibrium model and explore its implications for the properties of the returns on key financial assets, such as stocks, bonds and risky loans. We find that the mean and volatility of the equity premium, although small, are significantly higher than those in comparable adjustment cost models. However, we also show that these results require a procyclical financing premium, a property that seems at odds with the data.

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Document Object Identifier (DOI): 10.3386/w9364

Published: Gomes, Joao F., Amir Yaron and Lu Zhang. "Asset Prices And Business Cycles With Costly External Finance," Review of Economic Dynamics, 2003, v6(3,Oct), 767-788.

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