Asset Pricing with Free Entry and Exit of Firms

Lorant Kaszab, Ales Marsal, Katrin Rabitsch

Publication: Working/Discussion PaperWU Working Paper

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We study the asset-pricing implications of changes in the variety of consumption goods which happens through free entry and exit of firms. Fluctuations in varieties drive a wedge between the measured and model-based (including variety growth) consumer price index making the pricing kernel as well as asset prices more volatile without driving up the volatility of consumption growth. Different from earlier endowment economy models of variety growth our model contains production which i) generates the correlations important for the explanation of the high mean and volatility of equity premium endogenously, and ii) leads to an increase of about 140 basis points in the risk-premia relative to the endowment model.
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Number of pages13
Publication statusPublished - 1 May 2022

Publication series

SeriesDepartment of Economics Working Paper Series

WU Working Paper Series

  • Department of Economics Working Paper Series

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