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“Aggregate Investment and Stock Returns” By F.Duarte , L. Kogan and D. Livdan

“Aggregate Investment and Stock Returns” By F.Duarte , L. Kogan and D. Livdan. Discussion By D.P.Tsomocos. 3 rd International Moscow Finance Conference November 8-9,2013 Moscow. Summary I.

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“Aggregate Investment and Stock Returns” By F.Duarte , L. Kogan and D. Livdan

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  1. “Aggregate Investment and Stock Returns”ByF.Duarte , L. Kogan and D. Livdan Discussion By D.P.Tsomocos 3rd International Moscow Finance Conference November 8-9,2013 Moscow

  2. Summary I • A canonical real business cycle model with preference shocks to the representative household − time varying beliefs w.r.t. pessimism or optimism (cf habit formation) →variation of risk prices • Inverse relation between investment and future excess returns − lower discount rates → higher NPVs of investments → increased aggrregatet investment

  3. Summary II • Positive relation between investment and future stock market volatility − Elementary stock valuation implies that lower discount rates for given dividend rules increase equity prices. The lower the difference between discount and growth rates the higher the impact on prices. − since lower discount rates lead to higher investment → time varying discount rates generate positively related investment and stock market volatility.

  4. Summary III • A general equilibrium formulation of a stock market negative mean-variance trade off, ceteris paribus, generated by time varying discount rates. • Perturbations of production functions and preferences determine the variability of discount rates.

  5. Comments I • Real changes cause real effects → emphasis on prices rather than on quantities: • →Δ M • V = ΔP • Q̅ • Debreu-Mantel-Sonnenshein Theorem: • − “Any aggregate excess demand can be generated by a reasonable economy”.

  6. Comments II • Incomplete asset markets • −Precautionary motive causes higher equity premia (Weil, 1982) • Liquidity constraints and premia • −Liquidity shortages generate higher state prices and, thus, decrease investment (Goodhart, Espinoza and Tsomocos, 2009) • Modigliani-Miller • − Endogenous default and limited liability (Kashyap, Tsomocos and Vardoulakis, 2013)

  7. THANK YOU!

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