Asset Pricing, Macroeconomics
- The Collateralizability Premium, with Hengjie Ai, Kai Li, and Christian Schlag
Data: Firm-level collateralizability measures
Conference presentations: CICF (2019, Guangzhou), Corporate Policies and Asset Prices (2019, London), MFA (2020, Virtual), European Economic Association (2021, Virtual)
Abstract: Micro uncertainty (cross-sectional dispersion) and macro uncertainty (volatility of aggregate economic variables) are conceptually distinct. However, empirically, they comove and are countercyclical. This paper builds a general equilibrium model and demonstrates that credit market frictions allow micro uncertainty to drive time-varying macro uncertainty endogenously. In the model, as dispersion increases, more firms are pushed to the left tail of the productivity distribution, resulting in more defaults and a depletion in aggregate net worth. This mechanism generates countercyclical leverage and aggregate volatility. The model implies that the government can inject equity in economic downturns to stabilize aggregate volatility.
- Equilibrium Value and Profitability Premiums, with Hengjie Ai and Jincheng Tong
Conference presentations: WFA (2021, Virtual), MFA (2022, Chicago)
Abstract: Standard production-based asset pricing models cannot simultaneously explain the value premium and the gross profitability premium. Empirically, we show that value and profitability sorted portfolios differ in the persistence of productivity. We develop a general equilibrium model where firm-level productivity has a two-factor structure with different persistence. We demonstrate that with capital adjustment costs and variable capital utilization, our model can simultaneously account for both the gross profitability premium and the value premium.
- Markup Shocks and Asset Prices, with Alexandre Corhay and Jincheng Tong
Abstract: We explore the asset pricing implications of shocks that allow firms to extract more rents from consumers. These markup shocks directly impact the representative household's marginal utility and the firms' cash flow. Using firm-level data, we construct a measure of aggregate markup shocks and show that the price of markup risk is negative, that is, a positive markup shock is associated with high marginal utility states. Markup shocks generate differences in risk premia due to their heterogeneous impact on firms. Firms with larger exposures to markup shocks are less risky and have lower expected returns. We rationalize these findings in a general equilibrium model with markup shocks.