Asset Pricing

Article excerpt

The NBER's Program on Asset Pricing met at The Wharton School, University of Pennsylvania, on November 20. NBER researchers Leonid Kogan, Sloan School of Management at MIT, and Amir Yaron, The Wharton School, organized the meeting. These papers were discussed:

Stijn Van Nieuwerburgh, New York University and NBER, and Pierre-Olivier Weill, University of California, Los Angeles, "Why Has House Price Dispersion Gone Up?"

Discussant: Markus K. Brunnermeier, Princeton University and NBER

Robert Novy-Marx, University of Chicago, "Investment Cash Flow Sensitivity and the Value Premium"

Discussant: Joao Gomes, University of Pennsylvania

Arvind Krishnamurthy and Annette Vissing-Jorgensen, Northwestern University and NBER, "The Demand for Treasury Debt"

Discussant: Monika Piazzesi, University of Chicago and NBER

Martijn Cremers and Antti Petajisto, Yale University, "How Active is Your Fund Manager? A New Measure That Predicts Performance"

Discussant: Jonathan Berk, University of California, Berkeley and NBER

Long Chen, Michigan State University, and Xinlei Zhao, Kent State University, "Return Decomposition"

Discussant: John Heaton, University of Chicago and NBER

Lubos Pastor, University of Chicago and NBER, and Robert Stambaugh, University of Pennsylvania and NBER, "Predictive Systems: Living with Imperfect Predictors"

Discussant: Jonathan Lewellen, Dartmouth College and NBER

Nieuwerburgh and Weill investigate the 30-year increase in the level and dispersion of house prices across U.S. metropolitan areas, using a calibrated dynamic general equilibrium island model. The model is based on two main assumptions: households flow in and out of metropolitan areas in response to local wage shocks, and the housing supply cannot adjust instantly because of regulatory constraints. Feeding into the model the 30-year increase in cross-sectional wage dispersion that is documented based on metropolitan-level data, the authors generate the observed increase in house price level and dispersion. In equilibrium, workers flow towards exceptionally productive metropolitan areas and drive house prices up. The calibration also reveals that, while a baseline level of regulation is important, a tightening of regulation by itself cannot account for the increase in house price level and dispersion: in equilibrium, workers flow out of tightly regulated towards less regulated metropolitan areas, undoing most of the price impact of additional local supply regulations. Finally, the calibration with increasing wage dispersion suggests that the welfare effects of housing supply regulation are large.

Firms' equilibrium investment behavior explains two seemingly unrelated economic puzzles. Endogenous variation in firms' exposures to fundamental risks, resulting from optimal investment behavior, generates both investment-cash flow sensitivity and a countercyclical value premium. Novy-Marx explictly characterizes the investment strategies of heterogeneous firms as rules in industry average-Q that depend on the industry's concentration and capital intensity. Firms are unconstrained, investing when and because marginal-q equals one, but investment is still associated strongly with positive cash-flow shocks and only weakly with average-Q shocks, because firm value is insensitive to demand when demand is high. A value premium arises, both within and across industries, because the market-to-book sorting procedure over-weights the value portfolio with high-cost producers, firms in slow growing industries, and firms in industries that employ irreversible capital, which are riskier, especially in "bad" times. The two puzzles are linked directly, with theory predicting value firms should exhibit stronger investment-cash flow sensitivities than growth firms.

Krishnamurthy and Vissing-Jorgensen show that the U.S. debt/GDP ratio is negatively correlated with the spread between corporate bond yields and Treasury bond yields. …


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