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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
iη
Durable-good �rm
EYt =h(XtLEt )
θE K 1�θE�θIE ,t�1 D θI
I ,t�1
iη
DIt = (1� δ)DI ,t�1 + EIt
Durable-good inventory DIt is costly to adjust.
Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12
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
iη
Durable-good �rm
EYt =h(XtLEt )
θE K 1�θE�θIE ,t�1 D θI
I ,t�1
iη
DIt = (1� δ)DI ,t�1 + EIt
Durable-good inventory DIt is costly to adjust.
Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12
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
iη
Durable-good �rm
EYt =h(XtLEt )
θE K 1�θE�θIE ,t�1 D θI
I ,t�1
iη
DIt = (1� δ)DI ,t�1 + EIt
Durable-good inventory DIt is costly to adjust.
Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12
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
iη
Durable-good �rm
EYt =h(XtLEt )
θE K 1�θE�θIE ,t�1 D θI
I ,t�1
iη
DIt = (1� δ)DI ,t�1 + EIt
Durable-good inventory DIt is costly to adjust.
Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12
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
iη
Durable-good �rm
EYt =h(XtLEt )
θE K 1�θE�θIE ,t�1 D θI
I ,t�1
iη
DIt = (1� δ)DI ,t�1 + EIt
Durable-good inventory DIt is costly to adjust.
Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12
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
iη
Durable-good �rm
EYt =h(XtLEt )
θE K 1�θE�θIE ,t�1 D θI
I ,t�1
iη
DIt = (1� δ)DI ,t�1 + EIt
Durable-good inventory DIt is costly to adjust.
Xiaoji Lin (LSE) Discussion 05/18/09 7 / 12
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
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
DiscussionEuler equation estimation
Di¤erent parameter estimates at annual and quarterly frequency
Xiaoji Lin (LSE) Discussion 05/18/09 10 / 12
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
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
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
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