Equity Returns and the Output Shocks in a Dynamic Stochastic General Equilibrium Framework
Round 1
Reviewer 1 Report (New Reviewer)
1. Long introduction - this can easily be shortened only to highlight the important issue at hand.
2. The LR also could be further enhanced and significantly shortened. Some parts of the introduction fit better in the LR section. LR is about more than just summarising the literature. synthesise them while bringing out the real issue.
3. Derivation might be so significant here as this model has been proven in the past. Could you just cite the relevant literature? what is new from the derivation in section 3?
4. Page 21 - it is good to show the calibration results as the preliminary estimation for this paper.
5. As this involves time series data - stationarity testing is necessary.
6. The results and conclusion sections are rather anti-climax as the explanation, justification, story and also citing the previous study were rather limited as compared to the enormous introduction and LR sections.
7. How does forecasting be meaningfully used?
Author Response
Thank you for the thoughtful and specific comments. Please find our responses to each point in the attached document.
Author Response File: 
Author Response.pdf
Reviewer 2 Report (New Reviewer)
The paper has a high degree of actuality and relevance as it deals with the estimate of a real business cycle, dynamic stochastic general equilibrium (RBC DSGE) model of the U.S. economy based on the U.S. data for the period spanning the first quarter of 1960 to the first quarter of 2022. As it presents the impulse responses of equity returns to productivity shocks. Moreover, the paper draws attention to the fact that the responses of real GDP and other key macroeconomic variables corroborate the findings of other calibration-based DSGE models of the U.S. found in the literature.
The introduction substantiates the approach of the paper in a well-balanced manner, by explaining the ways in which the association of productivity and equity returns has been debated by scholars and professionals.
The literature elaborates on the next steps of the analysis and is relevant as it explains why this approach was adopted in dealing with the estimate of a real business cycle, dynamic stochastic general equilibrium (RBC DSGE) model of the U.S. economy based on the U.S. data, and details comprehensively the operational concepts analyzed in the subsequent chapters.
The materials and methods are presented in an organized and understandable manner in the subsequent chapter in which the sample construction and the empirical design are described by detailing relevant considerations. The statistical methods are well-fitted for the purposes of the paper and correspond to testing the elaborated hypotheses.
The results are presented in a comprehensive manner and by respecting the required methodological steps, in explaining the obtained results. Moreover, the institutional presence is just as well substantiated as regards its impact, especially for the model.
The conclusions underpin the findings obtained, but it would be recommendable to be more explicit and comprehensive, possibly by providing some policy recommendations, considering the current economic context at the global level.
The paper is soundly built, and the approach has originality, providing an interesting perspective that is necessary for the current uncertain economic environment. However, we would recommend more developed conclusions, and some minor language and grammar revisions. The paper is recommended for publication as it is a valuable contribution, and relevant with respect to the stated goal which is fully achieved.
Author Response
Dear Reviewer,
Thank you for taking the time and providing your feedback on our manuscript. We appreciate your thoughtful and supportive comments.
Round 2
Reviewer 1 Report (New Reviewer)
The authors revised accordingly to the comments provided earlier. The paper is now ready for acceptance.
This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.
Round 1
Reviewer 1 Report
This manuscript is a fragile study. It needs to be major revised.
1. RBC DSGE is a very mature model, and the methodological contribution of this paper needs to be more explicit, preferably with practical innovations.
2. The research period in this paper is too long, which makes the research data may span multiple specific economic growth cycles. This makes the results of this paper unrobust and lack specific applicability.
3. The literature review can best be carried out according to the two main clues of methodology development and problem discussion.
Author Response
Responses to Referee # 1
Equity Returns and the Output Shocks in a Dynamic Stochastic General Equilibrium Framework, JFRM, 2187008
We thank the referee for taking the time and making many comments. Below we respond to each point made.
- RBC DSGE is a very mature model, and the methodological contribution of this paper needs to be more explicit, preferably with practical innovations.
We agree. Our intention was to investigate equity returns within the framework of well-known RBC- DSGE models. DSGE models are practical enough to be deployed by all central banks. We are not sure how we could add to that aspect of the model.
- The research period in this paper is too long, which makes the research data may span multiple specific economic growth cycles. This makes the results of this paper unrobust and lack specific applicability.
DSGE models are dynamic and are designed to handle long time periods. For instance, see Cai, M., Del Negro, M., Herbst, E., Matlin, E., Sarfati, R., & Schorfheide, F. (2021). Online estimation of DSGE models. The Econometrics Journal, 24(1), C33-C58. As they say: “we construct a real-time dataset that starts in 1960:Q1, using data vintages available on the 10th of January, April, July, and October of each year, which we obtained from the St. Louis Fed’s ALFRED database. Our convention, which follows Del Negro and Schorfheide (2013), is to call the end of the estimation sample T. …” It turns out that their data set starts in the 1960s as well. The referee can also see Davis and Madsen (2001). Their estimation is based on 80 years of data.
- The literature review can best be carried out according to the two main clues of methodology development and problem discussion.
There were no problem to discuss. We started the literature review by citing previous work on equity returns, the center piece of this work. Subsequently we offered a brief discussion of DSGE models, because that was the framework for the empirical estimation.
Reviewer 2 Report
I did not find the reference Davis and Madsen (2001, 2006), Brown and Rowe (2007), and Ibbotson and Chen 23 (2003).
I think that the authors can also use the work:
Evolution in a General Equilibrium Framework. By Elvio Accinelli and Humberto Muñiz
Journal of Mathematical Economics Volume 96, October 2021, 102513 \\
Author Response
Responses to Referee # 2
Equity Returns and the Output Shocks in a Dynamic Stochastic General Equilibrium Framework, JFRM, 2187008
We thank the referee for taking the time and making many comments. Below we respond to each point made.
I did not find the reference Davis and Madsen (2001, 2006), Brown and Rowe (2007), and Ibbotson and Chen 23 (2003).
Response: The first two citations were missing and /or had typos. We have added the proper citation in the revised version.
I think that the authors can also use the work:
Evolution in a General Equilibrium Framework. By Elvio Accinelli and Humberto Muñiz
Journal of Mathematical Economics Volume 96, October 2021, 102513 \\
Response: While this paper is tangentially related to our work, we have added a paragraph at the end of the literature review and cited this paper.
Reviewer 3 Report
Hello.
The article is written and prepared at a good level.
But there are two comment
1. Improve and expand part of the
results and recommendations (Summary and Conclusions).
2. Add articles from
MDPI journals
to the literature review
Good Luck To You.
Comments for author File: Comments.pdf
Author Response
Responses to Referee # 3
Equity Returns and the Output Shocks in a Dynamic Stochastic General Equilibrium Framework, JFRM, 2187008
We thank the referee for taking the time and making many comments. Below we respond to each point made.
The article is written and prepared at a good level.
Response: Thank you.
But there are two comment
- Improve and expand part of the
results and recommendations (Summary and Conclusions).
Response: We added a paragraph regarding the findings and implications to the Summary section.
- Add articles from
MDPI journals
to the literature review
Good Luck To You.
Response: Thank you. We could not find any papers related to our research in MDPI journals based on a Google Scholar search.
Reviewer 4 Report
Comments for author File: Comments.pdf
Author Response
Responses to Referee # 4
Equity Returns and the Output Shocks in a Dynamic Stochastic General Equilibrium Framework, JFRM, 2187008
We thank the referee for taking the time and making many comments. We also appreciate that the paper receives the referee’s general approval indicated by “yes” to all the specific attributes of the manuscript. Combined with the subsequent rejection of the paper according to the editor, we are not sure that the referee believes that this paper is salvageable. Our intention was to investigate equity returns within the framework of well-known RBC- DSGE models.
Referee comments indicate that the research project could branch off in several potentially novel directions. We agree. However, we did not find any concrete citations that could help us in these efforts. We do plan on continuing to contribute to the field in several ways. The referee’s recommendation to further investigating the matter by deploying a VAR or SVAR could constitute an additional paper that could be considered.
We address the referee points in the order that they were made as follows:
- However, the model is calibrated or perhaps estimated, using macro data: data on asset returns hardly plays a role. There are no countercyclical risk premia, there are no reasonable equity premia, etc., there is not much of a distinction between riskless and risky assets.
Response: We are not sure how risk premia could be entered into the RBC-DSGE model at this time. Referee does not cite any published work that has attempted this approach. A citation or two would be helpful. If the referee is aware of a source for this comment, we would very much be interested in exploring it. To this date we have not seen such an attempt. We are not even sure that such an approach is necessary or possible. These models are stochastic and by their very nature embody risk. Expanding the RBC-DSGE along these lines may be a theoretical work that we are not ready to undertake at this point. Furthermore, it may be beyond the purview of JRFM.
- The model is very standard indeed, and its description and analysis could be shortened. Conversely, the key mechanism and results, i.e. the novel parts of the paper, should be given a more in-depth discussion.
Response: True. The only novel part of the paper is adding the behavior of equity returns within the standard RBC-DSGE model. We highlighted the role of productivity growth in equity returns at the outset of the paper.
- (1) is incomplete and is odd. This gets resolved in equation (4).
Response: Thank you. Different notations by two coauthors crept in. It has been corrected. This is a version of equation 2.1 in Understanding DSGW models, Theory and Applications, by Costa Junior, page 34.
- Examination of the paper shows that the model is actually calibrated, rather than estimated, see section IV: this should be stated appropriately in the abstract. It then is unclear, exactly what gets estimated, in table 2.
Response: We are not sure on what basis the referee is making this comment. We estimated the model in Stata and is not calibrated. We know the difference as we have worked on several of these models. Stata estimates the variances of the key model variables. We recommend that the referee try one in Stata (visit Stata Corp for sample code) to see similar results.
- A more standard approach is to use Dynare and Bayesian priors/posteriors, if there are parameters that still need estimation.
Response: Stata or Dynare are tools to accomplish the task. The objective here was to estimate the model and the software tool was not the main focus. We are familiar with Dynare and are currently working on a calibrated Neo Keynesian 3-equation model using Dynare. One coauthor has a brief manual for DSGE estimation and calibration on Dynare.
- It might be worthwhile to check www.macromodelbase.com and check the robustness of the conclusions drawn by investigating some other models as well.
Response: We are familiar with this site and just about any site that is related to DSGE models. The recommended site unfortunately has nothing to offer in this case.
As for equity returns following capital returns in this model, we believe that finding confirms that in the basic RBC-DSGE model, which is devoid of monetary and other financial market distortions, returns to equity investors as defined by S&P 500 returns, would follow the returns on firms’ capital investments.
While we appreciate the comments and suggestions for improvement, we will need to study them further and examine their feasibility within the DSGE model framework in our future research. Unfortunately, with no concrete citations and directions, we are not able to incorporate the referee’s recommendations in our revision. If the referee has done any work in the suggested areas, we would appreciate having access to such resources. The estimation of these models is still fraught with potential coding and software issues. We hope that the referee sees the value of our paper as a marginal step in the right direction.
Round 2
Reviewer 1 Report
First, the topic is so large that the actual periodic effect of the conclusion is useless. In addition, the methodology innovation of this paper is weak. I don't think it should be accepted.
Reviewer 4 Report
The paper is still largely unchanged.
