Title

Three essays on macroeconomics and asset pricing

Date of Award

2007

Availability

Article

Degree Name

Doctor of Philosophy (Ph.D.)

Department

Economics

First Committee Member

Adrian Peralta-Alva, Committee Chair

Abstract

This thesis has three essays studying different topics in macroeconomics and asset pricing. My first essay studies the connection between changes in taxes and regulations and the secular trends in U.S. equity prices during the last 45 years. The methods employed are those of classical financial economic theory. Production and capital accumulation decisions are thus taken as exogenous. The second essay generalizes this analysis using general equilibrium theory. In my model, asset prices, production, consumption, and capital accumulation decisions are jointly determined. Finally, my third essay performs an empirical investigation about the predictive power of the risk premium on future key macroeconomic variables.The behavior of the U.S. equity prices during the past 45 years is very puzzling. After wandering around 1 during the 1960s and early 1970s, the ratio of market value of U.S. corporations to GNP went down by roughly 50% within the last quarter of 1974. It then stagnated for the entire 1980s. This ratio started soaring at unprecedented rates during the early 1990s setting one record after another. By 2000, the market value to GNP ratio had doubled its 1960s average level. Then, there was another big market crash starting year 2001.The major movements in the U.S. equity prices have coincided with significant changes in taxes and regulations. In a seminal study, McGrattan and Prescott (2005) suggest changes in taxes and government regulatory rules are the main forces behind the secular trends of equity prices.To evaluate the impact of taxes and regulation rules on equity prices, I use both a traditional present value model, and a stochastic general equilibrium model. My analysis indicates that changes in taxes and regulations can quantitatively explain the average levels of U.S. equity prices during the 1960s and early 1970s, and also a considerable part of the stock market boom during the late 1990s. However, quantitative results from both models predict the equity prices to be much higher than they actually were during the 1980s and early 1990s. To some extent, my studies show that the U.S. stock market was dramatically undervalued during that period.The last part of this thesis empirically tests the predictive power of the equity risk premium on future macroeconomic activity. My results indicate that shocks to the risk premium have implications for economic conditions similar to those from monetary policy disturbances.

Keywords

Economics, Finance

Link to Full Text

http://access.library.miami.edu/login?url=http://gateway.proquest.com/openurl?url_ver=Z39.88-2004&rft_val_fmt=info:ofi/fmt:kev:mtx:dissertation&res_dat=xri:pqdiss&rft_dat=xri:pqdiss:3267685