Howard Kung

Innovation, Growth, and Asset Prices

We examine the asset pricing implications of a production economy whose long-term growth prospects are endogenously determined by innovation and R&D. In equilibrium, Rh&D endogenously drives a small, persistent component in productivity which generates long-run uncertainty about economic growth. With recursive preferences, households fear that persistent downturns in economic growth are accompanied by low asset valuations and command high risk premia in asset markets. Empirically, we find substantial evidence for innovation-driven low-frequency movements in aggregate growth rates and asset market valuations. In short, equilibrium growth is risky.

Macroeconomic Linkages between Monetary Policy and the Term Structure of Interest Rates

This paper studies the equilibrium term structure of nominal and real interest rates and time-varying bond risk premia implied by a stochastic endogenous growth model with imperfect price adjustment. The production and price-setting decisions of firms drive low-frequency movements in growth and inflation rates that are negatively related. With recursive preferences, these growth and inflation dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.

The Asset Redeployability Channel: How Uncertainty Affects Corporate Investment

This paper examines how uncertainty affects corporate investment under varying degrees of asset redeployability. We develop new measures of asset redeployability by accounting for the usability of assets within and across industries. We identify plausibly exogenous shocks to economic uncertainty by using major economic and political events. We find that after an increase in uncertainty, firms using less redeployable capital reduce investment more. More redeployable assets exhibit higher recovery rates and are traded more actively in secondary markets. Overall, our results suggest that frictions in redeploying assets affect liquidation values and therefore make firms cautious about investment decisions under uncertainty.Received August 29, 2014; accepted July 13, 2016, by Editor Itay Goldstein.

Computational Methods for Production-Based Asset Pricing Models with Recursive Utility

We compare local and global polynomial solution methods for DSGE models with Epstein- Zin-Weil utility. We show that model implications for macroeconomic quantities are relatively invariant to choice of solution method but that a global method can yield substantial improve- ments for asset prices and welfare costs. The divergence in solution quality is highly dependent on parameters which effect value function sensitivity to TFP volatility, as well as the magnitude of TFP volatility itself. This problem is pronounced for calibrations at the extreme of those accepted in the asset pricing literature and disappears for more traditional macroeconomic parameterizations.

Competition, Markups and Predictable Returns

Imperfect competition is an important channel for time-varying risk premia in asset markets. We build a general equilibrium model with monopolistic competition and endogenous firm entry and exit. Endogenous variation in industry concentration generates countercyclical markups, which amplifies macroeconomic risk. The nonlinear relation between the measure of firms and markups endogenously generates countercyclical macroeconomic volatility. With recursive preferences, the volatility dynamics leads to countercyclical risk premia forecastable with measures of competition. Also, the model produces a U-shaped term structure of equity returns.

Limited Marital Commitment and Household Portfolios

This paper examines the link between marital decisions, consumption, and optimal portfolio choice in a life-cycle model with limited marital commitment. Without full commitment, individual income shocks lead to renegotiation between spouses, altering relative bargaining power and endogenously generating time-varying risk aversion at the household-level. Consequently, changes in relative income are associated with significant shifts in household portfolios. We find strong support for this prediction using data from the PSID. The model can also rationalize the link between marital transitions and portfolio allocations observed in the data. Finally, the risk-sharing benefits of marriage imply a positive link between wealth and risky asset holdings across households.

A Macroeconomic Foundation for the Equilibrium Term Structure of Interest Rates

This paper explores the term structure of interest rates implied by a stochastic endogenous growth model with imperfect price adjustment. The production and pricesetting decisions of rms drive low-frequency movements in growth and ination rates that are negatively related. With recursive preferences, these growth and ination dynamics are crucial for rationalizing key stylized facts in bond markets. When calibrated to macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields and the failure of the expectations hypothesis.

Equilibrium Growth, Inflation, and Bond Yields

This paper explores bond pricing implications of a stochastic endogenous growth model with imperfect price adjustment. In this setting, the production and price-setting decisions of firms drive low-frequency movements in macro growth and inflation rates that are negatively related, as in the data. With recursive preferences, these endogenous long-run growth and inflation dynamics are crucial for explaining a number of stylized facts in bond markets. Notably, when calibrated to a wide range of macroeconomic data, the model quantitatively explains the means and volatilities of nominal bond yields. The model also generates a sizeable equity premium and high investment volatility.

The CAPM Strikes Back? An Equilibrium Model with Disasters

Embedding disasters into a general equilibrium model with heterogeneous firms induces strong nonlinearity in the pricing kernel, helping explain the empirical failure of the (consumption) CAPM. Our single-factor model reproduces the failure of the CAPM in explaining the value premium in finite samples without disasters and its relative success in samples with disasters. Due to beta measurement errors, the estimated beta-return relation is flat, consistent with the beta “anomaly,” even though the true beta-return relation is strongly positive. Finally, the consumption CAPM fails in simulations, even though a nonlinear model with the true pricing kernel holds exactly by construction.

Government maturity structure twists

This paper explores the interactions between yield curve dynamics and nominal government debt maturity operations in a New Keynesian model with endogenous bond risk premia. Violations of debt maturity neutrality occur when the yield curve slope is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure has contractionary (expansionary) effects.