1. “Aggregate Investment and Stock Returns” By F.Duarte, L. Kogan and D. Livdan Discussion By D.P.Tsomocos 3 rd International Moscow Finance Conference November 8-9,2013 Moscow

2. Summary I A canonical real business cycle model with preference shocks to the representative household − time varying beliefs w.r.t. pessimism or optimism (cf habit formation) → variation of risk prices Inverse relation between investment and future excess returns − lower discount rates → higher NPVs of investments → increased aggrregatet investment 2

3. Summary II 3 Positive relation between investment and future stock market volatility − Elementary stock valuation implies that lower discount rates for given dividend rules increase equity prices. The lower the difference between discount and growth rates the higher the impact on prices. − since lower discount rates lead to higher investment → time varying discount rates generate positively related investment and stock market volatility.

4. Summary III A general equilibrium formulation of a stock market negative mean-variance trade off, ceteris paribus, generated by time varying discount rates. Perturbations of production functions and preferences determine the variability of discount rates. 4

5. Comments I 5 Real changes cause real effects → emphasis on prices rather than on quantities: → Δ M V = Δ P Q ̅ Debreu-Mantel-Sonnenshein Theorem: − “Any aggregate excess demand can be generated by a reasonable economy”.

6. Comments II 6 Incomplete asset markets −Precautionary motive causes higher equity premia (Weil, 1982) Liquidity constraints and premia −Liquidity shortages generate higher state prices and, thus, decrease investment (Goodhart, Espinoza and Tsomocos, 2009) Modigliani-Miller − Endogenous default and limited liability (Kashyap, Tsomocos and Vardoulakis, 2013)

7. THANK YOU! 7