Date of Award

5-6-2024

Author's School

Graduate School of Arts and Sciences

Author's Department

Economics

Degree Name

Doctor of Philosophy (PhD)

Degree Type

Dissertation

Abstract

This dissertation consists of three independent articles in the fields of Macreconomics and Financial Economics. Chapter one investigates the determinants of the demand for bonds of different maturities and the relationship with differences in idiosyncratic risk in an heterogeneous agent framework. Chapter two studies the effect of policy instability on the risk-return trade-off of different financial assets. Chapter three studies macroeconomic risk in an incomplete market economy. In the first chapter "Heterogenous Liquidity Demand and the Term Structure of Interest Rates" I study what determines differences in the demand for bonds of different maturities. I focus on the effect of differences in idiosyncratic risk. I find evidence that relates the demand for bonds of different maturities with earnings risk. To provide a rationale for these findings, I build a continuous-time, general equilibrium model with heterogeneous agents, two assets and incomplete markets. The model succesfully reproduces the fact that high idiosyncratic risk is associated with high demand for short-term assets, while low idiosyncratic risk is related to high demand for long-term assets. The second chapter "Policy Instability and the Risk-Return Trade-Off", coauthored with Rodolfo Manuelli, we study what is the impact of large swings in economic policy on the risk-return trade-off faced by investors. We use data from Argentina---a country that has experienced frequent and very large regime changes---and find that the risk-return for individual assets and minimum variance portfolios are quite different across regimes. We then develop a dynamic model to understand optimal portfolios when investors are cognizant that regimes can change. We find that when portfolios are unrestricted, it is optimal for investors to take a large amount of risk. On the other hand, when portfolios are restricted to include only long positions, a real asset (real estate) dominates financial assets. The third chapter "Incomplete Markets and Macroeconomic Risk" analyze the equilibrium dynamics of asset prices, investment and risk premia in an incomplete financial market economy that is subject to aggregate risk shocks. It also addresses the question on how economic conditions endogenously affect risk in the economy. To this end, I use a continuous time macroeconomic model with financial frictions. The main findings of this article are that an exogenous increase in aggregate risk causes an increase in asset price volatility, an increase in risky asset returns through an increase in risk-premia, a decline in asset prices, investment and risk free interest rates. Moreover, the model presented here is able to reproduce counter-cyclical endogenous risk. This results also depend on how constrained are financial intermediaries. If financial intermediaries are constrained some of the results are amplified.

Language

English (en)

Chair and Committee

Rodolfo Manuelli

Download

Share

COinS