Review of Financial Studies Vol. 29 No. 1 2016
Wage Rigidity: A Quantitative Solution to Several Asset Pricing Puzzles
Abstract
In standard production models, wage volatility is far too high, and equity volatility is far too low. A simple modification–sticky wages because of infrequent resetting together with a constant elasticity of substitution (CES) production function leads to both smoother wages and higher equity volatility. Further, the model produces several other hard-to-explain features of financial data: high Sharpe ratios, low and smooth interest rates, time-varying equity volatility and premium, a value premium, and a downward-sloping equity term structure. Procyclical, volatile wages are a hedge for firms in standard models; smoother wages act like operating leverage, making profits and dividends riskier.
- DOI
- 10.1093/rfs/hhv041
- Volume
- 29
- Issue
- 1
- Pages
- 148-192
- Language
- en
- Sources
- openalex crossref