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Fundamental Stock Price Cycles
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Abstract. News shocks about higher future capital returns can explain stock price-booms and subsequent -busts in a two-asset, heterogeneous agent New Keynesian model. The portfolio choice between liquid assets (like stocks) and illiquid capital is key, as it allows for a time-varying illiquidity premium. Upon the news, capital-rich households accept to hold more illiquid capital at a lower premium, in anticipation of higher future returns on it. This increases their consumption risk, and causes stock prices to rise. After the boom, capital-rich households trade capital for liquid assets in order to self-insure against idiosyncratic income shocks, which increases the illiquidity premium, and causes stock prices to fall. Novel evidence from survey data on portfolio choices of capital-wealthy households during stock price boom-bust cycles supports the key mechanism of the model.
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Newest version: pdf
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An Endogenous Gridpoint Method for Distributional Dynamics (with Christian Bayer, University of Bonn, Ralph Luetticke, and Yannis Winkelmann, both University of Tuebingen)
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Abstract. The "histogram method" (Young, 2010), while the standard approach for analyzing distributional dynamics in heterogeneous agent models, is linear in optimal policies. We introduce a novel method that captures nonlinearities of distributional dynamics. This method solves the distributional dynamics by interpolation instead of integration, which is made possible by making the grid endogenous. It retains the tractability and speed of the histogram method, while increasing numerical efficiency even in the steady state and producing significant economic differences in scenarios with aggregate risk. We document this by studying aggregate investment risk with a third-order solution using perturbation techniques.
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Newest version: pdf, CEPR Discussion Paper
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- Understanding the Rise in Inflation: Demand or Supply? (with Thomas Kohler, independent scholar, Jean-Paul L'Huillier, Brandeis University, and Gregory Phelan, Williams College)
- The liquidity premium in heterogeneous agent models: an analytical framework
You can find my CV here.