Macro-Finance, Empirical Asset Pricing
Rm 4063, Lee Shau Kee Bldg, Hong Kong University of Science and Technology, Hong Kong
Tel: (+852) 97948792
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This paper studies the asset pricing implications of idiosyncratic labor income tail risk on credit spread. I propose a model featuring incomplete market, heterogeneous households with recursive preference, and comovement of tail risk in labor income and firm cash flow growth. The model produces strong covariation of households' marginal utility and default rates, which helps to explain the stylized fact that the credit spread (1) is on average large and (2) is positively related to labor tail risk. Quantitatively, the tail risk premium can account for as much as 68% of the observed credit spread. My framework provides a new insight, drawn from an option perspective, that the implications of idiosyncratic tail risk for equity and bond can be very different.
This paper studies the implications of parameter learning on the cross-section of stock returns. We propose a production-based general equilibrium model to study the link between capital age, timing of cash flows and expected returns in the cross-section of stocks. Our model features slow learning about firms' exposure to aggregate productivity shocks over time. Firms with old capital are assumed to have more information about their exposure than firms with young capital. Our framework provides a unified explanation of the following stylized empirical facts: old capital firms (1) have higher capital allocation efficiency; (2) are more exposed to aggregate productivity shocks and hence earn higher expected returns, which we call it the capital age premium; (3) have shorter cash-flow duration, as compared with young capital firms.