Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle
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This article estimates a business cycle model with endogenous financial asset supply and ambiguity averse investors. Firms’ shareholders choose not only production and investment, but also capital structure and payout policy subject to financial frictions. An increase in uncertainty about profits lowers stock prices and leads firms to substitute away from debt as well as reduce shareholder payout. This mechanism parsimoniously accounts for the postwar comovement in investment, stock prices, leverage, and payout, at both business cycle and medium term cycle frequencies. Ambiguity aversion permits a Markov-switching VAR representation of the model, while preserving the effect of uncertainty shocks on the time variation in the equity premium.
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Associate Professor of Economics
Currently, Bianchi’s main research interests involve the role of agents’ beliefs in explaining changes in the reduced form properties of the macroeconomy. Bianchi has also done work on the interaction between the real economy and the term structure of interest rates and on the role of rare events in shaping agents’ expectations.