Nominal Rigidities and Asset Pricing

Abstract

This paper examines the asset-pricing implications of nominal rigidities. I find that firms that adjust their product prices infrequently earn a cross-sectional return premium of more than 4% per year. Merging confidential product price data at the firm level with stock returns, I document that the premium for sticky-price firms is a robust feature of the data and is not driven by other firm and industry characteristics. The consumption-wealth ratio is a strong predictor of the return differential in the time series, and differential exposure to systematic risk fully explains the premium in the cross section. The sticky-price portfolio has a conditional market β of 1.3, which is 0.4 higher than the β of the flexible-price portfolio. The frequency of price adjustment is therefore a strong determinant of the cross section of stock returns. To rationalize these facts, I develop a multi-sector production-based asset-pricing model with sectors differing in their frequency of price adjustment.JEL classification: E12, E44, E52, G12

Are Sticky Prices Costly? Evidence from the Stock Market

“…Both adjustments (panel B: columns 5 and 6, and columns 7 and 8) take out a lot of common variation, reducing both explanatory power and point estimates somewhat but leaving statistical significance and relative magnitudes unchanged or even increasing them slightly. This reduced but significant sensitivity of CAPM-adjusted returns is consistent with Weber (2015), which documents that β is a function of price stickiness. As a result, the increased volatility of stock returns for firms with stickier prices in response to nominal shocks is partially realized via increased riskiness of these stocks.…”

Are Sticky Prices Costly? Evidence from the Stock Market

“…All three adjustments (Panel B: columns (5) and (6), columns (7) and (8), and columns (9) and (10)) take out a lot of common variation, reducing both explanatory power and point estimates somewhat but leaving statistical significance and relative magnitudes unchanged or even increasing them slightly. This reduced but significant sensitivity of market-adjusted returns is consistent with Weber (2015). He documents that β is a function of price stickiness.…”

Market Structure and Monetary Non-neutrality

“…Nakamura and Steinsson (2010) incorporate heterogeneity in menu costs. Weber (2016) and Gorodnichenko and Weber (2016) incorporate heterogeneity in the Calvo parameter. For identical exogenous menu costs, I find that prices endogenously change less frequently under duopoly.…”

“…They find no significant relationship. 53 For examples, see Nakamura and Steinsson (2010), Weber (2016), and Weber, Pasten, and Schoenle (2017). 54 These statistics are computed as follows.…”