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Discussion: "Durability of Output and Expected Stock Returns" by Gomes, Kogan and Yogo Xiaoji Lin London School of Economics and Political Science and FMG FMG conference on Housing, Financial Markets and the Macroeconomy May 18, 2009 Xiaoji Lin (LSE) Discussion 05/18/09 1 / 12

Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

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Page 1: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Discussion:"Durability of Output and Expected Stock

Returns"by Gomes, Kogan and Yogo

Xiaoji Lin

London School of Economics and Political Science and FMG

FMG conference on Housing, Financial Markets and the Macroeconomy

May 18, 2009

Xiaoji Lin (LSE) Discussion 05/18/09 1 / 12

Page 2: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Summary of the Paper

New facts

1 The CF of the durable-good portfolio is more cyclical.2 Signi�cant risk premium between the durable-good and the service portfolios.3 The durable-good risk premium is countercyclical and predictable.

The model

1 a durable-good sector and a nondurable-good sector2 replicates the empirical �ndings.

Xiaoji Lin (LSE) Discussion 05/18/09 2 / 12

Page 3: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Summary of the Paper

New facts

1 The CF of the durable-good portfolio is more cyclical.2 Signi�cant risk premium between the durable-good and the service portfolios.3 The durable-good risk premium is countercyclical and predictable.

The model

1 a durable-good sector and a nondurable-good sector2 replicates the empirical �ndings.

Xiaoji Lin (LSE) Discussion 05/18/09 2 / 12

Page 4: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Summary of the Paper

New facts

1 The CF of the durable-good portfolio is more cyclical.2 Signi�cant risk premium between the durable-good and the service portfolios.3 The durable-good risk premium is countercyclical and predictable.

The model

1 a durable-good sector and a nondurable-good sector2 replicates the empirical �ndings.

Xiaoji Lin (LSE) Discussion 05/18/09 2 / 12

Page 5: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Summary of the Paper

New facts

1 The CF of the durable-good portfolio is more cyclical.2 Signi�cant risk premium between the durable-good and the service portfolios.3 The durable-good risk premium is countercyclical and predictable.

The model

1 a durable-good sector and a nondurable-good sector2 replicates the empirical �ndings.

Xiaoji Lin (LSE) Discussion 05/18/09 2 / 12

Page 6: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Summary of the Paper

New facts

1 The CF of the durable-good portfolio is more cyclical.2 Signi�cant risk premium between the durable-good and the service portfolios.3 The durable-good risk premium is countercyclical and predictable.

The model

1 a durable-good sector and a nondurable-good sector2 replicates the empirical �ndings.

Xiaoji Lin (LSE) Discussion 05/18/09 2 / 12

Page 7: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Summary of the Paper

New facts

1 The CF of the durable-good portfolio is more cyclical.2 Signi�cant risk premium between the durable-good and the service portfolios.3 The durable-good risk premium is countercyclical and predictable.

The model

1 a durable-good sector and a nondurable-good sector2 replicates the empirical �ndings.

Xiaoji Lin (LSE) Discussion 05/18/09 2 / 12

Page 8: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Summary of the Paper

New facts

1 The CF of the durable-good portfolio is more cyclical.2 Signi�cant risk premium between the durable-good and the service portfolios.3 The durable-good risk premium is countercyclical and predictable.

The model

1 a durable-good sector and a nondurable-good sector2 replicates the empirical �ndings.

Xiaoji Lin (LSE) Discussion 05/18/09 2 / 12

Page 9: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

My Discussion

A very nice paper on heterogeneous output and returns

A few remarks on the empirical �ndings and the model

Xiaoji Lin (LSE) Discussion 05/18/09 3 / 12

Page 10: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Empirical Facts(i) Cross section

Signi�cant premium between the durable-good portfolio and the service portfolio

Xiaoji Lin (LSE) Discussion 05/18/09 4 / 12

linx6
Pencil
Page 11: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Empirical FactsTime series

Risk premium between the durable-good portfolio and the market portfolio iscountercyclical

Ris

k P

rem

ium

Year1930 1940 1950 1960 1970 1980 1990 2000­0.6

­0.4

­0.2

0

0.2

0.4

0.6

0.8

1

1.2Durables­MarketDurables­Services

Data Source: Yogo�s Webpage

Xiaoji Lin (LSE) Discussion 05/18/09 5 / 12

Page 12: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelThe literature

The existing literature of the production-based asset pricing:

Homogeneous product but with heterogeneous productivity (characteristics)

Gomes, Kogan and Zhang (2003), Carlson, Fisher and Giammarino (2004)and Zhang (2005)

Production-based pricing kernels

Jermann (2008), Belo (2009)

This paper

general equilibriumheterogeneous output

Boldrin, Christiano and Fisher 2001; Papanikolaou 2008

Xiaoji Lin (LSE) Discussion 05/18/09 6 / 12

Page 13: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelThe literature

The existing literature of the production-based asset pricing:

Homogeneous product but with heterogeneous productivity (characteristics)

Gomes, Kogan and Zhang (2003), Carlson, Fisher and Giammarino (2004)and Zhang (2005)

Production-based pricing kernels

Jermann (2008), Belo (2009)

This paper

general equilibriumheterogeneous output

Boldrin, Christiano and Fisher 2001; Papanikolaou 2008

Xiaoji Lin (LSE) Discussion 05/18/09 6 / 12

Page 14: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelThe literature

The existing literature of the production-based asset pricing:

Homogeneous product but with heterogeneous productivity (characteristics)

Gomes, Kogan and Zhang (2003), Carlson, Fisher and Giammarino (2004)and Zhang (2005)

Production-based pricing kernels

Jermann (2008), Belo (2009)

This paper

general equilibriumheterogeneous output

Boldrin, Christiano and Fisher 2001; Papanikolaou 2008

Xiaoji Lin (LSE) Discussion 05/18/09 6 / 12

Page 15: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelThe literature

The existing literature of the production-based asset pricing:

Homogeneous product but with heterogeneous productivity (characteristics)

Gomes, Kogan and Zhang (2003), Carlson, Fisher and Giammarino (2004)and Zhang (2005)

Production-based pricing kernels

Jermann (2008), Belo (2009)

This paper

general equilibriumheterogeneous output

Boldrin, Christiano and Fisher 2001; Papanikolaou 2008

Xiaoji Lin (LSE) Discussion 05/18/09 6 / 12

Page 16: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelThe literature

The existing literature of the production-based asset pricing:

Homogeneous product but with heterogeneous productivity (characteristics)

Gomes, Kogan and Zhang (2003), Carlson, Fisher and Giammarino (2004)and Zhang (2005)

Production-based pricing kernels

Jermann (2008), Belo (2009)

This paper

general equilibriumheterogeneous output

Boldrin, Christiano and Fisher 2001; Papanikolaou 2008

Xiaoji Lin (LSE) Discussion 05/18/09 6 / 12

Page 17: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelDi¤erences between nondurables and durables

1 Consumer side:Nondurable consumption good

Ct = Ct

Durable consumption good

Dt = (1� δ)Dt�1 + Et

2 Producer side:Nondurable-good �rm

CYt =h(XtLCt )

θC K 1�θCC ,t�1

Durable-good �rm

EYt =h(XtLEt )

θE K 1�θE�θIE ,t�1 D θI

I ,t�1

DIt = (1� δ)DI ,t�1 + EIt

Durable-good inventory DIt is costly to adjust.

Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12

Page 18: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelDi¤erences between nondurables and durables

1 Consumer side:Nondurable consumption good

Ct = Ct

Durable consumption good

Dt = (1� δ)Dt�1 + Et

2 Producer side:Nondurable-good �rm

CYt =h(XtLCt )

θC K 1�θCC ,t�1

Durable-good �rm

EYt =h(XtLEt )

θE K 1�θE�θIE ,t�1 D θI

I ,t�1

DIt = (1� δ)DI ,t�1 + EIt

Durable-good inventory DIt is costly to adjust.

Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12

Page 19: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelDi¤erences between nondurables and durables

1 Consumer side:Nondurable consumption good

Ct = Ct

Durable consumption good

Dt = (1� δ)Dt�1 + Et

2 Producer side:Nondurable-good �rm

CYt =h(XtLCt )

θC K 1�θCC ,t�1

Durable-good �rm

EYt =h(XtLEt )

θE K 1�θE�θIE ,t�1 D θI

I ,t�1

DIt = (1� δ)DI ,t�1 + EIt

Durable-good inventory DIt is costly to adjust.

Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12

Page 20: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelDi¤erences between nondurables and durables

1 Consumer side:Nondurable consumption good

Ct = Ct

Durable consumption good

Dt = (1� δ)Dt�1 + Et

2 Producer side:Nondurable-good �rm

CYt =h(XtLCt )

θC K 1�θCC ,t�1

Durable-good �rm

EYt =h(XtLEt )

θE K 1�θE�θIE ,t�1 D θI

I ,t�1

DIt = (1� δ)DI ,t�1 + EIt

Durable-good inventory DIt is costly to adjust.

Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12

Page 21: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelDi¤erences between nondurables and durables

1 Consumer side:Nondurable consumption good

Ct = Ct

Durable consumption good

Dt = (1� δ)Dt�1 + Et

2 Producer side:Nondurable-good �rm

CYt =h(XtLCt )

θC K 1�θCC ,t�1

Durable-good �rm

EYt =h(XtLEt )

θE K 1�θE�θIE ,t�1 D θI

I ,t�1

DIt = (1� δ)DI ,t�1 + EIt

Durable-good inventory DIt is costly to adjust.

Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12

Page 22: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelDi¤erences between nondurables and durables

1 Consumer side:Nondurable consumption good

Ct = Ct

Durable consumption good

Dt = (1� δ)Dt�1 + Et

2 Producer side:Nondurable-good �rm

CYt =h(XtLCt )

θC K 1�θCC ,t�1

Durable-good �rm

EYt =h(XtLEt )

θE K 1�θE�θIE ,t�1 D θI

I ,t�1

DIt = (1� δ)DI ,t�1 + EIt

Durable-good inventory DIt is costly to adjust.

Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12

Page 23: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

The ModelThe setup

Aggregate productivity

Xt = Xt�1 exp (µ+ zt + et )

zt = φzt�1 + νt

Utility �ow

u (Ct ,Dt ) =h(1� α)C1�1/ρ

t + αD1�1/ρt

i1/(1�1/ρ)

Epstein-Zin-Weil preference

Ut =�(1� β) u (Ct ,Dt )

1�1/σ + βEthU1�γt+1

i(1�γ)/(1�1/σ)�1/(1�1/σ)

Xiaoji Lin (LSE) Discussion 05/18/09 8 / 12

Page 24: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

DiscussionEmpirics

The rise of the service sector coincides with the declining of the durables-servicespremium: Hall (2001), Bazdresch, Belo and Lin (2009)

1930 1940 1950 1960 1970 1980 1990 2000 20100

10

20

30

40

50

Sha

re o

f GD

P (p

erce

ntag

e)

Year

DurablesNonDurablesServices

Data Source: NIPA Table 1.10

Xiaoji Lin (LSE) Discussion 05/18/09 9 / 12

Page 25: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

DiscussionEuler equation estimation

Di¤erent parameter estimates at annual and quarterly frequency

Xiaoji Lin (LSE) Discussion 05/18/09 10 / 12

linx6
Pencil
linx6
Pencil
linx6
Pencil
Page 26: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

DiscussionTheory

1 Gauge the implications of two di¤erent shocks (Croce 2008).

Quantitative implications of the persistent shock in the two-sector model?

Di¤erent implications of the persistent shock for the durable-goods sector?

2 Ideally, simultaneously estimate and solve the model (SMM, GMM).

Elasticity of intertemporal substitution are di¤erent in calibration andestimation.

3 Add in �rm-speci�c shock to investigate the performance of the CAPM.

Conceptually easy, however "curse of dimensionality" may apply.

Xiaoji Lin (LSE) Discussion 05/18/09 11 / 12

Page 27: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Conclusions

Very nice and very interesting paper!

Empirical fact: durability is an important source of heterogeneity in returns.

A detailed subsample analysis would be ideal.

The model leads to interesting predictions.

Simultaneously estimating and solving the model would be nice.

Xiaoji Lin (LSE) Discussion 05/18/09 12 / 12

Page 28: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Conclusions

Very nice and very interesting paper!

Empirical fact: durability is an important source of heterogeneity in returns.

A detailed subsample analysis would be ideal.

The model leads to interesting predictions.

Simultaneously estimating and solving the model would be nice.

Xiaoji Lin (LSE) Discussion 05/18/09 12 / 12

Page 29: Discussion: Durability of Output and Expected Stock Returns · 16.05.2009  · Empirical Facts Time series Risk premium between the durable-good portfolio and the market portfolio

Conclusions

Very nice and very interesting paper!

Empirical fact: durability is an important source of heterogeneity in returns.

A detailed subsample analysis would be ideal.

The model leads to interesting predictions.

Simultaneously estimating and solving the model would be nice.

Xiaoji Lin (LSE) Discussion 05/18/09 12 / 12