Firm-Heterogeneity and Production-Based Asset Pricing: The Role of Habit Sensitivity and Lumpy Investment
Speaker: Zhiting Wu, University of St Andrews
I study the interaction between risk premiums and lumpy investment in both time-series and cross-section. To this end, I make a variant of habit sensitivity function of Campbell & Cochrane (1999) habit preference that produces 100% equity volatility by generating volatile marginal utility and robustly matches investment dynamics under non-convex costs. Second, my model reproduces almost 100% equity premiums because the benchmark calibration assigns additional weights on precautionary savings and constrained firms, respectively. My model also generates considerable size premiums since small firms absorb more productivity risks. Finally, my model reasonably matches crucial moments of macro-dynamics and the cross-sectional investment rate.