Saturday, Jan. 5, 2019 8:00 AM - 10:00 AM
- Chair: Stijn Van Nieuwerburgh, Columbia University
Risk-Adjusted Capital Allocation and Misallocation
AbstractWe develop a theory linking "misallocation," i.e., dispersion in static marginal products of capital (MPK), to systematic investment risks. In our setup, firms differ in their exposure to these risks, which we show leads naturally to heterogeneity in firm-level risk premia and, more importantly, MPK. The theory predicts that cross-sectional dispersion in MPK (i) depends on cross-sectional dispersion in risk exposures and (ii) fluctuates with the price of risk, and thus is countercyclical. We document strong empirical support for these predictions. We devise a strategy to quantify variation in firm-level risk exposures using data on the dispersion of expected stock market returns. Our estimates imply that risk considerations explain almost 40% of observed MPK dispersion among US firms and in particular, can rationalize a large persistent component in firm-level MPK deviations. Our framework provides a sharp link between aggregate volatility, cross-sectional asset pricing and long-run economic performance -- MPK dispersion induced by risk premium effects, although not prima facie inefficient, lowers the average level of aggregate TFP by as much as 7%, suggesting large "productivity costs" of business cycles.
Term Structure of Risk in Expected Returns
AbstractThis article develops an empirical methodology to determine which economic shocks span risk in asset returns and fluctuations in discount rate news and cash flow news. The methodology identifies orthogonal structural sources of aggregate risk from a present-value model augmented with a theoretically motivated shock identification scheme. The choice of the shock identification scheme is based on the properties of the term structure of risk in expected returns in the data and in equilibrium models. In an empirical application, I find that (i) shocks in the variance of consumption growth account for 94% of risk in the one-quarter stock returns; (ii) a shock in the long-run mean of the variance of consumption growth spans discount rate news and contributes 47% to the aggregate market risk, (iii) a jump and a regular shock in the variance of consumption growth, together with the direct dividend shock span cash flow news and contribute 53% to the aggregate market risk.
Mortgage Design and Slow Recoveries: The Role of Recourse and Default
AbstractWe show that mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities and cause deeper and more persistent recessions. This mechanism can account for up to 40% of the recovery gap during the Great Recession between the U.S. (mostly a non-recourse economy) and European economies with recourse mortgage systems. Recourse mortgages also generate larger welfare inequality following credit shocks. General equilibrium effects cause most of the differences across mortgage systems. Liquid assets play a larger role in explaining default with recourse mortgages.
- G0 - General