Semi-Parametric Restrictions on Production-Based Asset Pricing Models

Matching asset price volatility in production economies is difficult. This paper shows that this difficulty can be summarized by three nested restrictions. First, matching asset price volatility requires volatile investment returns. Second, volatile investment returns require either large capital adjustment costs or volatile investment specific technology shocks. Third, large costs or volatile shocks require a low elasticity of intertemporal substitution. I quantify these restrictions and show that they apply to a broad class of models which spans many assumptions about preferences, beliefs, market completeness or the stochastic structure of shocks