Understanding the Equity Risk Premium (ERP) and the factors affecting it is cardinal to financial economics, particularly to equity research analysts, domestic and international institutional investors and financial economist. Since the seminal work of Mehra and Prescott (1985) there has been an exponential rise in the research explaining the reasons for ERP puzzle. This review, systematically, investigates the literature related to ERP in four key dimensions. The first dimension is regarding the issues related to different techniques of estimating the ERP. The second dimension is regarding the studies that explain the reasons of existence of the ERP puzzle by making modifications to the preference structures. The third is regarding the macroeconomic variables that help in predicting ERP and the fourth deals with studies that are conducted in the international context. In addition to this, this review meticulously captures some important limitations of the existing literature regarding the estimation of ERP and identifies the domestic and international determinants of ERP, in particular the UK ERP and proposes novel future directions of research. These future research directions have two important implications for my PhD. The first is the academic contribution that predominantly comes from methodological contribution of estimating the ERP. The second is the practical contribution that comes mainly from identifying the unique set of variables (UK domestic and international), which are of prime importance to the domestic and foreign institutional investors because of the financial crisis of 2008-2009 and which should affect the UK ERP.

This dissertation consists of three essays on monetary economics. The first two essays have a focus on the zero lower bound on the nominal interest rate (ZLB) and the Great Recession. In the first essay, I investigate optimal discretionary monetary policy under the ZLB in the case of a distorted steady state due to monopoly and taxation. I find that the central bank in a more distorted economy would cut the interest rate less aggressively under a particular adverse demand shock. This occurs because the ZLB is less likely to bind and the economy escapes from the ZLB sooner. In addition, I show that the conventional linear-quadratic method is not accurate when the ZLB binds. In the second essay, I model the role of subprime lending, deleveraging and an incomplete financial market in driving an economy to the liquidity trap with binding ZLB. There are two key features that differentiate my work from the current literature of deleveraging and the ZLB. First, I endogenize the debt limit of borrowing-constrained households by tying it to the market value of collateral assets. Second and more importantly, I allow for subprime lending. I am able to show that the second feature drives the economy to the ZLB more likely under an adverse shock to the credit market. When the ZLB binds, a great recession emerges with a free fall in output and the price level, mostly due to the Fisherian debt deflation that puts more debt burden on the borrowers. The third essay examines the role of habit formation in solving the persistence problem - output response is transient and not hump-shaped under a monetary shock - in the conventional state dependent pricing model. Intuitively, incorporating habit formation makes consumers less aggressive in spending under a shock, resulting in more persistent response of output. With a moderate habit formation, I am able to show that the model produces hump-shaped and very persistent response of output under a monetary growth shock.

Sustaining behaviour change is fundamental for the effective uptake of policies and practices aimed at improving individual and collective health, yet it can be very difficult for individuals to adhere to new desired health-related behaviours. A prospective solution is to focus on instilling these behaviours as a habit. Once instilled as a habit, behaviours are performed automatically given specific cues, and they relieve the cognitive stress of having to make a volitional decision towards performing the behaviour - making it more resistant to relapse. Several information systems (IS) are being proposed to help individual users instil target behaviours as habits so that they can be performed even when intentions shift. However, these systems tend to be designed in an ad hoc manner and, as a result, their effectiveness can vary substantially. To better guide the design of information systems that can support users in forming health-related behaviours as a habit, we define a subclass of systems called Habit Formation Support Systems (HFSS) and adopt the design science research approach to develop two artifacts: (1) a design-relevant theory explaining and predicting how IS-supported habit formation can be achieved called the Theory for the Formation of IS-Supported Habits (T-FISSH); and (2) a suite of design principles to guide the design of systems that can effectively support users in forming a desired health-related behaviour as a habit. We contend that habit theory and IS continuance theory can be used to anchor the development of the two artifacts. The T-FISSH was refined and validated using exploratory and confirmatory focus groups with academics and health behaviour change practitioners respectively. The design principles were refined with systems design and development professionals and validated through a reusability check that involved a design activity and reusability questionnaire. The theoretical contribution of the thesis lies in moving the habit formation knowledge base into the design realm through the development of a design-relevant explanatory/predictive theory. From a practical perspective, this research presents a suite of theory-anchored design principles that are intended to guide the design and development of systems that can support users in forming desired health-related behaviours as a habit.

This collection of essays examines the impact of two antecedents of household food consumption: SNAP and habit formation to nutrients. Household food choice invariably plays a substantial role in health outcomes such as obesity. Low-income households may be especially vulnerable to obesity as they face a more restricted set of food choices due to income constraints and may have less information on healthy eating relative to high-income households. This dissertation unravels this dynamic by providing causal estimates of the effect of two major determinants of food choice. Chapter 2 and chapter 3 test the impact of SNAP participation on consumption of foods that are likely to cause obesity. With some exceptions, SNAP restricts benefits to be spent only on unprepared grocery food items from participating retailers. Chapter 2 considers the broad category of Food Away From Home (FAFH) which is shown to be less healthy than meals prepared at home and shows that SNAP significantly reduces FAFH expenditure of participants. However, the magnitude of this decrease is not large enough to have a tangible impact on obesity. Chapter 3 considers household expenditure on carbonated soda, which is the key source of sugar intake among low-income households. Not only is carbonated soda SNAP-eligible, it is cheaper when purchased with SNAP benefits relative to cash because benefits are exempt from all sales taxes. Results show that SNAP participation leads to a significant rise in carbonated soda sales in low-income counties. I also find that the SNAP tax exemption does not lead to higher consumption among participants relative to non-participants. Chapter 4 tests habit formation to dietary fat using purchases of ground meat and milk products. Products in both categories have salient fat content information on the packaging. Products within each category differ only by fat content and are usually identical otherwise. Differences in habit formation are, therefore, caused by different levels of fat content. Results show a positive association between habit formation and fat content for all products in the ground meat category and all products, except fat-free milk, in the milk category. However, this relationship is modest leading to the conclusion that policy interventions, such as a saturated fat tax, might be effective in discouraging consumption of high fat products.

This dissertation studies a class of path-dependent stochastic control problems with applications to Finance. In particular, we solve the open problem of the continuous time expected utility maximization with addictive consumption habit formation in incomplete markets under two independent scenarios. In the first project, we study the continuous time utility optimization problem with consumption habit formation in general incomplete semimartingale financial markets. Introducing the set of auxiliary state processes and the modified dual space, we embed our original problem into an abstract time-separable utility maximization problem with a shadow random endowment on the product space. We establish existence and uniqueness of the optimal solution using convex duality by defining the primal value function as depending on two variables, i.e., the initial wealth and the initial standard of living. We also provide market independent sufficient conditions both on the stochastic discounting processes of the habit formation process and on the utility function for the well-posedness of our original optimization problem. Under the same assumptions, we can carefully modify the classical proofs in the approach of convex duality analysis when the auxiliary dual process is not necessarily integrable. In the second project, we examine an example of the optimal investment and consumption problem with both habit-formation and partial observations in incomplete markets driven by It\^{o} processes. The individual investor develops addictive consumption habits gradually while only observing the market stock prices but not the instantaneous rates of return, which follow an Ornstein-Uhlenbeck process. Applying the Kalman-Bucy filtering theorem and Dynamic Programming arguments, we solve the associated Hamilton-Jacobi-Bellman(HJB) equation fully explicitly for this path dependent stochastic control problem in the case of power utility preferences. We provide the optimal investment and consumption policy in explicit feedback form using rigorous verification arguments. / text

Submitted by Daniella Santos (daniella.santos@fgv.br) on 2009-08-07T12:32:56Z No. of bitstreams: 1 Dissertação_Jivago_Vasconcelos.pdf: 444244 bytes, checksum: a4ae0c0f31d2c2371cb0e5b822e7da78 (MD5) / Approved for entry into archive by Antoanne Pontes(antoanne.pontes@fgv.br) on 2009-08-07T17:37:15Z (GMT) No. of bitstreams: 1 Dissertação_Jivago_Vasconcelos.pdf: 444244 bytes, checksum: a4ae0c0f31d2c2371cb0e5b822e7da78 (MD5) / Made available in DSpace on 2009-08-07T17:37:15Z (GMT). No. of bitstreams: 1 Dissertação_Jivago_Vasconcelos.pdf: 444244 bytes, checksum: a4ae0c0f31d2c2371cb0e5b822e7da78 (MD5) / Verdelhan (2009) shows that if one is to explain the foreign ex- change forward premium behavior using Campbell and Cochrane (1999) s habit formation model one must specify it in such a way to generate pro-cyclical short term risk free rates. At the calibration procedure, we show that this is only possible in Campbell and Cochrane s framework under implausible parameters speci cations given that the priceconsumption ratio diverges in almost all parameters sets. We, then, adopt Verdelhan s shortcut of xing the sensivity function (st) at its steady state level to attain a nite value for the price-consumption ratio and release it in the simulation stage to ensure pro-cyclical risk free rates. Beyond the potential inconsistencies that such procedure may generate, as suggested by Wachter (2006), with pro-cyclical risk free rates the model generates a downward sloped real yield curve, which is at odds with the data. / Verdelhan (2009) mostra que desejando-se explicar o comporta- mento do prêmio de risco nos mercados de títulos estrangeiros usando- se o modelo de formação externa de hábitos proposto por Campbell e Cochrane (1999) será necessário especificar o retorno livre de risco de equilíbrio de maneira pró-cíclica. Mostramos que esta especificação só é possível sobre parâmetros de calibração implausíveis. Ainda no processo de calibração, para a maioria dos parâmetros razoáveis, a razão preço-consumo diverge. Entretanto, adotando a sugestão proposta por Verdelhan (2009) - de xara função sensibilidade (st) no seu valor de steady-state durante a calibração e liberá-la apenas durante a simulação dos dados para se garantir taxas livre de risco prócíclicas - conseguimos encontrar um valor nito e bem comportado para a razão preço-consumo de equilíbrio e replicar o foward premium anomaly. Desconsiderando possíveis inconsistências deste procedimento, sobre retornos livres de risco pró-cíclicos, conforme sugerido por Wachter (2006), o modelo utilizado gera curvas de yields reais decrescentes na maturidade, independentemente do estado da economia - resultado que se opõe à literatura subjacente e aos dados reais sobre yields.

Research macroeconomists have witnessed remarkable methodological developments in mathematical, statistical, and computational tools during the last two decades. The three essays in this dissertation took advantage of these advances to analyze important macroeconomic issues. The first essay, “ Habit Formation, Adjustments Costs, and International Business Cycle Puzzles” analyzes the extent to which incorporating habit formation and adjustment costs in investment in a one-good two-country general equilibrium model would help overcome some of the international business cycle puzzles. Unlike standard results in the literature, the model generates persistent, cyclical adjustment paths in response to shocks. It also yields positive cross-country correlations in consumption, employment, investment, and output. Cross-country correlations in output are higher than the ones in consumption. This is qualitatively consistent with the stylized facts. These results are particularly striking given the predicted negative correlations in investment, employment, and output that are typically found in the literature. The second essay, “Comparison Utility, Endogenous Time Preference, and Economic Growth,” uses World War II as a natural experiment to analyze the degree to which a model where consumers' preferences exhibit comparison-based utility and endogenous discounting is able to improve upon existing models in mimicking the transitional dynamics of an economy after a shock that destroys part of its capital stock. The model outperforms existing ones in replicating the behavior of the saving rate (both on impact and along the transient paths) after this historical event. This result brings additional support to the endogenous rate of time preference being a crucial element in growth models. The last essay, “Monetary Policy under Fear of Floating: Modeling the Dominican Economy,” presents a small scale macroeconomic model for a country (Dominican Republic) characterized by a strong presence of fear of floating (reluctance to have a flexible exchange rate regime) in the conduct of monetary policy. The dynamic responses of this economy to external shocks that are of interest for monetary policy purposes are analyzed under two alternative interest rate policy rules: One being the standard Taylor rule and another that responds explicitly to deviations of the exchange rate with respect to its long-term trend.

No description available.

Diese Dissertation beinhaltet drei eigenständige Aufsätze, die die Interaktionen von Bewertungsmodellen für Wertpapiere, Finanzmärkten und der Volkswirtschaft untersuchen. Alle drei Papiere tragen zu einem besseren Verständnis von Verknüpfungen zwischen Finanzmärkten und Realwirtschaft. Im Mittelpunkt dieser Arbeit stehen Gewohnheitspräferenzen und Bayesianische Schätzmethoden, um sowohl theoretische als auch empirische Erkenntnisse zu liefern, die helfen, die makroökonomische und die Finanzliteratur stärker zu verbinden. Das erste Essay beschäftigt sich mit Gewohnheitspräferenzen und deren Fähigkeit, verschiedene Aktienrenditen in einem Portfolio zu erklären. Die zugrunde gelegten konsumbasierten Bewertungsmodelle basieren auf mikrofundierten Präferenzen und implizieren somit individuelles und aggregiertes Verhalten von Individuen. Aus diesem Grund werden Bayesianische Methoden genutzt, um diese a priori Information in die Schätzung einfließen zu lassen. Im zweiten Essay, einer gemeinsamen Arbeit mit Harald Uhlig, schätzen wir ein DSGE-Modell. Hervorzuheben ist, dass wir sowohl die Momente zweiter Ordnung für Wertpapierrenditen berücksichtigen als auch die a priori Wahrscheinlichkeiten für stilisierte Fakten wie Frisch-Elastizität und Sharpe ratio. Dieses Vorgehen liefert eine Modellschätzung, die gleichzeitig Fakten der Konjunkturzyklen, Momente zweiter Ordnung von Wertpapierrenditen sowie Finanzmarktfakten besser erklären kann. Das dritte Essay präsentiert ein DSGE-Modell, das die Interaktionen der Aktienmarktbooms zum Ende der 1980er und 1990er Jahre mit der Realwirtschaft erklären kann. Mit Hilfe nichtseparabler Präferenzen und nominaler Rigiditäten lässt sich der simultane Anstieg von BIP, Konsum, Investitionen, geleisteten Arbeitsstunden und Löhnen in dieser Zeit erklären. Abschließend wird die Rolle der Geldpolitik während Aktienmarktbooms diskutiert, und es werden optimale geldpolitische Regeln hergeleitet. / This thesis consists of three self-contained essays that investigate the interaction of asset prices and financial markets with the macroeconomy. All papers extend the existing literature in order to enhance the understanding of the strong degree of cross-linking between financial markets and the ‘rest of the economy’. In particular, the thesis focuses on habitually formed preferences and Bayesian techniques to yield theoretical and empirical insights, which help to reduce the existing gap between asset pricing and macroeconomic literature. The first essay examines and compares the ability of habitually formed preferences to explain the cross section of asset returns compared to successful factor models. Such consumption-based asset pricing models are based on micro- founded preferences, implying a linkage to individual and aggregate behavior. For this reason, the essay uses a Bayesian approach with a priori information derived from the empirical Business Cycle literature. In the second essay which is joint work with Harald Uhlig, we use Bayesian techniques to estimate a DSGE model. Especially, we explore a way to include conditional second moments of asset returns into the estimation. Moreover, we constrain the estimation by a priori probabilities on the Sharpe ratio and the Frisch elasticity. By doing so, the estimated model can well jointly explain key business cycle facts, different volatilities of several asset returns, and the empirically observed equity premium. The third essay presents a DSGE model, which covers the observed co-movements of stock market boom and bust episodes in the 1980''s and 1990''s and the economy. By including non-separable preferences and nominal rigidities, the model explains the simultaneous rise of consumption, output, investments, hours worked, and wages during a boom and the subsequent bust. Finally, the role of monetary policy during stock market booms is discussed, and optimal monetary policy rules are evaluated.

Consumption-based asset pricing models (CCAPMs) connect asset returns with consumption growth. The poor empirical performance of early consumption models has led to the development of a number of more sophisticated models. Nevertheless, most models focus on the US markets, and very few CCAPMs have been examined in the Australian context. Given the importance of CCAPMs, the purpose of this thesis is to examine the connections between asset returns in the Australian market and consumption variables. The thesis also extends the analysis to examine CCAPMs in an international setting. There are four essays in this thesis. The first essay undertakes a thorough investigation of the empirical support for consumption-based asset pricing models in the context of several major Australian asset classes. Using the generalised method of moments (GMM) econometric approach, my study begins with the classic CCAPM originally tested by Hansen and Singleton (1982, 1983). The empirical analysis is then extended to test more-recent specifications of the CCAPM, including the habit-formation models of Abel (1990) and Campbell and Cochrane (2000), and the time nonseparable model of Epstein and Zin (1991). For each of the models examined, the results provide cautious support for the CCAPM especially in relation to equity returns. Size-sorted portfolios (in particular, portfolios of small stocks) and fixed-income returns cause the CCAPM restriction to be rejected. It also presents results that raise questions over the benefits from extensions of the classic CCAPM, such as habit-persistence and recursive utility models. The second essay studies the empirical performance of a linearised version of the classic CCAPM in the Australian market. The studies of Faff and Oliver (1998) and Faff (1998) are extended by employing more recent data and examining 25 size/BM portfolios as well as industry portfolios. It is found that by using the lagged portfolio returns, the linearised CCAPM for both industry portfolios and 25 size/BM portfolios is generally not rejected. The third essay empirically examines conditional CCAPMs where the conditioning variables are consumption factors such as the consumption-wealth ratio proposed by Lettau and Ludvigson (2001a, 2001b), the surplus consumption ratio (Campbell and Cochrane, 1999), and the labour income to consumption ratio (Santos and Veronesi, 2006). Here long-horizon return predictability tests are conducted using these factors and cross-sectional tests on whether these factors are priced using both 25 Size/BM portfolios and industry portfolios. Utilising the Fama-MacBeth (1973) procedure, it is found that conditional models perform better than unconditional models. However, these conditional models do not outperform the Fama-French three-factor model. The fourth essay tests the world CCAPMs. Using data for 17 countries, the following are tested: the classic world CCAPM under the assumption of complete international markets integration, the heterogeneous world CCAPM under the framework of Constantinides and Duffie (1996) and the world habit models. The finding here is that a large risk aversion is needed to resolve the equity premium puzzle for the classic world CCAPM; however, adding a cross-country consumption dispersion factor into the model significantly lowers the coefficients of consumption risk aversion. Unconditional linear factor models are also studied where it is found that the world consumption growth and the dispersion of the cross-sectional consumption growth provide some explanatory basis for the variation in the cross section of excess stock returns. More sophisticated consumption models perform better than the classic world CCAPM. This thesis makes a worthwhile contribution to the research literature on CCAPMs in Australia which up to now has been limited. It performs out-of-sample tests of major CCAPMs utilising several Australian asset classes. It not only provides some insights into the return predictability of the aggregate market index in Australia, but also presents some evidence of the explanation of the cross section of stock returns using consumption variables. Further, this thesis adds to the understanding of the