Investment Shocks and Asset Prices

I explore the implications for asset prices and macroeconomic dynamics of shocks that improve real investment opportunities and thus affect the representative household’s marginal utility. These investment shocks generate differences in risk premia due to their heterogeneous impact on firms: they benefit firms producing investment relative to firms producing consumption goods and increase the value of growth opportunities relative to the value of existing assets. Using data on asset returns, I find that a positive investment shock leads to high marginal utility states. A general equilibrium model with investment shocks matches key features of macroeconomic quantities and asset prices.