Becker Friedman Institute

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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 financial conditions leads firms to substitute away from debt and reduce shareholder payout in bad times when measured risk premia are high. Regime shifts in volatility generate large low frequency movements in asset prices due to uncertainty premia that are disconnected from the business cycle.

Authors: 
Cosmin Ilut, Duke University
Francesco Bianchi, Duke University
Martin Schneider, Stanford University
Publication Date: 
July, 2013
BFI Initiative: 
Publication Type: