Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium
abstract: This dissertation is a collection of three essays relating household financial obligations to asset prices. Financial obligations include both debt payments and other financial commitments. In the first essay, I investigate how household financial obligations affect the equity premium. I...
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ndltd-asu.edu-item-439482018-06-22T03:08:09Z Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium abstract: This dissertation is a collection of three essays relating household financial obligations to asset prices. Financial obligations include both debt payments and other financial commitments. In the first essay, I investigate how household financial obligations affect the equity premium. I modify the standard Mehra-Prescott (1985) consumption-based asset pricing model to resolve the equity risk premium puzzle. I focus on two channels: the preference channel and the borrowing constraints channel. Under reasonable parameterizations, my model generates equity risk premiums similar in magnitudes to those observed in U.S. data. Furthermore, I show that relaxing the borrowing constraint shrinks the equity risk premium. In the Second essay, I test the predictability of excess market returns using the household financial obligations ratio. I show that deviations in the household financial obligations ratio from its long-run mean is a better forecaster of future market returns than alternative prediction variables. The results remain significant using either quarterly or annual data and are robust to out-of-sample tests. In the third essay, I investigate whether the risk associated with household financial obligations is an economy-wide risk with the potential to explain fluctuations in the cross-section of stock returns. The multifactor model I propose, is a modification of the capital asset pricing model that includes the financial obligations ratio as a ``conditioning down" variable. The key finding is that there is an aggregate hedging demand for securities that pay off in periods characterized by higher levels of financial obligations ratios. The consistent pricing of financial obligations risk with a negative risk premium suggests that the financial obligations ratio acts as a state variable. Dissertation/Thesis Jahangiry, Pedram (Author) Mehra, Rajnish (Advisor) Wahal, Sunil (Committee member) Reffett, Kevin (Committee member) Arizona State University (Publisher) Economics Finance Consumption based asset pricing model Cross-section of stock returns Debt service ratio Equity risk premium Financial obligation ratio Market returns predictability eng 128 pages Doctoral Dissertation Economics 2017 Doctoral Dissertation http://hdl.handle.net/2286/R.I.43948 http://rightsstatements.org/vocab/InC/1.0/ All Rights Reserved 2017 |
collection |
NDLTD |
language |
English |
format |
Doctoral Thesis |
sources |
NDLTD |
topic |
Economics Finance Consumption based asset pricing model Cross-section of stock returns Debt service ratio Equity risk premium Financial obligation ratio Market returns predictability |
spellingShingle |
Economics Finance Consumption based asset pricing model Cross-section of stock returns Debt service ratio Equity risk premium Financial obligation ratio Market returns predictability Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium |
description |
abstract: This dissertation is a collection of three essays relating household financial obligations to asset prices. Financial obligations include both debt payments and other financial commitments.
In the first essay, I investigate how household financial obligations affect the equity premium. I modify the standard Mehra-Prescott (1985) consumption-based asset pricing model to resolve the equity risk premium puzzle. I focus on two channels: the preference channel and the borrowing constraints channel. Under reasonable parameterizations, my model generates equity risk premiums similar in magnitudes to those observed in U.S. data. Furthermore, I show that relaxing the borrowing constraint shrinks the equity risk premium.
In the Second essay, I test the predictability of excess market returns using the household financial obligations ratio. I show that deviations in the household financial obligations ratio from its long-run mean is a better forecaster of future market returns than alternative prediction variables. The results remain significant using either quarterly or annual data and are robust to out-of-sample tests.
In the third essay, I investigate whether the risk associated with household financial obligations is an economy-wide risk with the potential to explain fluctuations in the cross-section of stock returns. The multifactor model I propose, is a modification of the capital asset pricing model that includes the financial obligations ratio as a ``conditioning down" variable. The key finding is that there is an aggregate hedging demand for securities that pay off in periods characterized by higher levels of financial obligations ratios. The consistent pricing of financial obligations risk with a negative risk premium suggests that the financial obligations ratio acts as a state variable. === Dissertation/Thesis === Doctoral Dissertation Economics 2017 |
author2 |
Jahangiry, Pedram (Author) |
author_facet |
Jahangiry, Pedram (Author) |
title |
Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium |
title_short |
Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium |
title_full |
Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium |
title_fullStr |
Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium |
title_full_unstemmed |
Essays in Finance and Macroeconomics: Household Financial Obligations and the Equity Premium |
title_sort |
essays in finance and macroeconomics: household financial obligations and the equity premium |
publishDate |
2017 |
url |
http://hdl.handle.net/2286/R.I.43948 |
_version_ |
1718701378187034624 |