Cyclical asset returns in the consumption and investment goods sector

We document the empirical fact that asset prices in the consumption-goods and investment-goods sector behave almost identically in the U.S. economy. In order to derive the cyclical behavior of the equity returns in these two sectors, we consider a two-sector real business cycle model with habit formation, sector-specific growth and adjustment costs of capital. The model is able to replicate the equity premium and the Sharpe values observed empirically, reflects the similarity of the cross-correlation structure between asset returns and aggregate output in the two sectors, and generally succeeds in capturing both the weak predictability of the real risk-free rate and the good predictability of excess returns at the bi-sectoral level.