This paper considers the term structure of interest rates implied by a production-based asset pricing model in which the fundamental drivers are investment in equipment and structures as well as inflation. The model matches the average yield curve up to five-year maturity almost perfectly. Longer term yields are roughly as volatile as in the data. The model also generates time-varying bond risk premiums. In particular, when running Fama-Bliss regressions of excess returns on forward premiums, the model produces slope coefficients of roughly half the size of the empirical counterparts. Closed-form expressions highlight the importance of the capital depreciation rates for interest rate dynamics.

This paper studies the determinants of the equity premium as implied by producers’ first-order conditions. A simple closed form expression is presented for the Sharpe ratio as a function of investment volatility and technology parameters. Calibrated to the US postwar economy, the model can match the historical first and second moments of the market return and the risk-free interest rate. The model also generates a very volatile Sharpe ratio and market price of risk.

This paper presents an approach for pricing gold from investors’ perspective. The model is based on no-arbitrage principles with minimal structural assumptions. There is no need to specify investor preferences. When fitted to match 10-year real U.S. Treasury rates, the model can replicate the salient fluctuations in the time series of gold prices since 2007. The model is also able to capture key patterns of CME Comex gold futures prices. The model implies that the majority of the value of gold is due to its role as an investment asset.

Since October 2008, fixed rates for interest rate swaps with a 30-year maturity have been mostly below Treasury rates with the same maturity. Under standard assumptions, this implies the existence of arbitrage opportunities. This paper presents a model for pricing interest rate swaps, where frictions for holding bonds limit arbitrage. I analytically show that negative swap spreads should not be surprising. In the calibrated model, swap spreads can reasonably match empirical counterparts without the need for large demand imbalances in the swap market. Empirical evidence is consistent with the relation between term spreads and swap spreads in the model. Received April 16, 2017; editorial decision Januray 3, 2019 by Editor Stijn Van Nieuwerburgh.

We document the cyclical properties of US firms' financial flows and show that equity payout is procyclical and debt payout is countercyclical. We then develop a model with debt and equity financing to explore how the dynamics of real and financial variables are affected by “financial shocks.” We find that financial shocks contributed significantly to the observed dynamics of real and financial variables. The recent events in the financial sector show up as a tightening of firms' financing conditions which contributed to the 2008–2009 recession. The downturns in 1990–1991 and 2001 were also influenced by changes in credit conditions. (JEL E23, E32, E44, G01, G32)

We study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible. We solve analytically for efficient allocations and for the corresponding asset prices, portfolio holdings, and solvency constraints for a simple example. Then we calibrate a more general model to U.S. aggregate as well as idiosyncratic income processes. We find equity premia, risk premia for long-term bonds, and Sharpe ratios of magnitudes similar to the U.S. data for lowrisk aversion and a low time-discount factor.

We study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible. We solve analytically for efficient allocations and for the corresponding asset prices, portfolio holdings, and solvency constraints for a simple example. Then we calibrate a more general model to U.S. aggregate as well as idiosyncratic income processes. We find equity premia, risk premia for long-term bonds, and Sharpe ratios of magnitudes similar to the U.S. data for low risk aversion and a low time-discount factor.

We derive a lower bound for the volatility of the permanent component of investors' marginal utility of wealth or, more generally, asset pricing kernels. The bound is based on return properties of long-term zero-coupon bonds, risk-free bonds, and other risky securities. We find the permanent component of the pricing kernel to be very volatile; its volatility is about at least as large as the volatility of the stochastic discount factor. A related measure for the transitory component suggest it to be considerably less important. We also show that, for many cases where the pricing kernel is a function of consumption, innovations to consumption need to have permanent effects.

We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the resulting pricing kernel with the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks. Additionally, we show that asset prices depend only on the valuation of agents with substantial idiosyncratic risk.

Empirical research on the permanent-income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent-income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors. Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth.