The demand for durable goods is more cyclical than that for nondurable goods and services. Consequently, the cash flow and stock returns of durable-good producers are exposed to higher systematic risk. Using the NIPA input-output tables, we construct portfolios of durable-good, nondurable-good, and service producers. In the cross-section, a strategy that is long on durables and short on services earns a sizable risk premium. In the time series, a strategy that is long on durables and short on the market portfolio earns a countercyclical risk premium. We develop an equilibrium asset-pricing model that explains these empirical findings.

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A search-theoretic model of equilibrium unemployment is constructed and shown to be consistent with the key regularities of the labor market and standard facts about the business cycle. The two distinguishing features of this work are: (i) the decision to accept or reject jobs is modeled explicitly, and (ii) markets are incomplete. The framework is well suited to address a number of interesting policy questions. Two such applications are provided: the impact of unemployment insurance, and the welfare costs of business cycles.

We examine investment behavior when firms face costs in the access to external funds. We find that despite the existence of liquidity constraints, standard investment regressions predict that cash flow is an important determinant of investment only if one ignores q. Conversely, we also obtain significant cash flow effects even in the absence of financial frictions. These findings provide support to the argument that the success of cash flow augmented investment regressions is probably due to a combination of measurement error in q and identification problems.

This paper suggests that skill accumulation through past work experience, or \learning-by-doing" (LBD), can provide an important propagation mechanism in a dynamic stochastic general equilibrium model, as the current labor supply a®ects future productivity. Our econometric analysis uses a Bayesian approach to combine micro-level panel data with  aggregate time series. Formal model evaluation shows that the introduction of the LBD mechanism improves the model's ability to ¯t the dynamics of aggregate output and hours.

We construct a dynamic general equilibrium production economy to explicitly link expected stock returns to firm characteristics such as firm size and the book-to-market ratio. Stock returns in the model are completely characterized by a conditional CAPM. Size and book-to-market are correlated with the true conditional market beta and therefore appear to predict stock returns. The cross-sectional relations between firm characteristics and returns can subsist even after one controls for typical empirical estimates of beta. These findings suggest that the empirical success of size and book-to-market can be consistent with a single-factor conditional CAPM model.

In this paper we show that the main empirical findings about firm diversification and performance are consistent with the maximization of shareholder value. In our model, diversification allows a firm to explore better productive opportunities while taking advantage of synergies. By explicitly linking the diversification strategies of the firm to differences in size and productivity, our model provides a natural laboratory to investigate quantitatively several aspects of the relationship between diversification and performance. Specifically, we show that our model is able to rationalize both the evidence on the diversification discount (Lang and Stulz (1994)) and the documented relation between diversification and firm productivity (Schoar (2002)).

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 is significantly higher than in comparable adjustment cost models. However, we show that these results require a procyclical financing premium, a property that seems at odds with the data.

We incorporate costly external finance in an investment-based asset pricing model and investigate whether financing frictions are quantitatively important for pricing a cross-section of expected returns. We show that common assumptions about the nature of the financing frictions are captured by a simple “financing cost” function, equal to the product of the financing premium and the amount of external finance. This approach provides a tractable framework for empirical analysis. Using GMM, we estimate a pricing kernel that incorporates the effects of financing constraints on investment behavior. The key ingredients in this pricing kernel depend not only on “fundamentals”, such as profits and investment, but also on the financing variables, such as default premium and the amount of external financing. Our findings, however, suggest that the role played by financing frictions is fairly negligible, unless the premium on external funds is procyclical, a property not evident in the data and not satisfied by most models of costly external finance.

The Right Stimulus Extended Unemployment Insurance Benefits or Tax Cuts?