Essays in Macroeconomics and Finance
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Date
2017-09-01
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Johns Hopkins University
Abstract
This dissertation consists of three papers. The first paper studies the comovement between returns to stocks and nominal Treasury bonds, which varies over time in both magnitude and direction. Earlier research attempts to interpret this phenomenon as a consequence of variations in the link between inflation and future economic activity. I present some opposing empirical evidence, and instead argue that in the data, the comovement between stock and nominal bond returns is driven by real factors. I build a New Keynesian model that generates this behavior through the joint dynamics of output, inflation, and interest rates. The model features two types of persistent shocks to productivity growth: mean-reverting cyclical shocks and permanent trend shocks. The relative importance of these two shocks varies stochastically over time. The model quantitatively explains the observed patterns in stock-bond return comovement.
The goal of the second paper is to quantify variation in the volatility of firm-level productivity shocks and study its impact via the accumulation of capital across firms. I first document robust empirical evidence on the upward trend in firm-level productivity shocks volatility. Then, I develop a tractable general equilibrium model to study the consequences of the increase in idiosyncratic volatility. The model features heterogeneous firms which make irreversible investment decisions over time.
The third papers investigates the cross-sectional pricing of idiosyncratic volatility risk by presenting a new model for idiosyncratic stock return volatility. In the model, idiosyncratic volatility consists of two components. One is a long-run component and could be modeled as containing a unit root. The other is short-run and is less persistent. Compared to models used in the literature, this model can better capture the persistence of idiosyncratic volatility in the long-run. Estimating the model using the cross-section of stock returns, I decompose the idiosyncratic volatility into short-run and long-run components and explore the cross-sectional pricing of different components. I find that there is a significantly negative relationship between expected long-run volatility and expected return. In contrast, expected short-run volatility is not found to be significantly related to expected return. These findings remain robust after controlling for return reversals.
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Macroeconomics, Finance