This thesis explores links between aggregate investment and asset prices. Many popular theories that link investment and asset prices - such as rational bubbles and Tobin's q - do a poor job of describing the empirical reality. Examples include asset price booms that, in hindsight, may be described as bubbles leading to higher investment, contradicting the predictions from rational bubble models. Another example is the very low sensitivity of investment to Tobin's q in almost all empirical applications and evidence suggesting that q is not a sufficient statistic for investment. One relatively undeveloped area ofthe investment is that which considers a role for information asymmetries and social learning. Chapter II develops a partial equilibrium model based on Caplin and Leahy (1994) in which firms make investment decisions regarding a risky project each period after learning new infonnation about likely returns. This information is from private sources and the asset market. The key results of this model are that: asset prices affect the length and amplitude ofthe investment cycle; a small number of noisy market signals may dominate a very large number of accurate firm signals, due to frict~onal costs faced by the fum; there exist feedback channels from investment back to asset prices; and informational asymmetries impose ex-ante welfare costs on the economy. Chapter III extends this model by describing in detail the process of asset price formation. Chapter IV empirically tests some hypotheses from these theoretical models using aggregate U.S. data and a V AR model. The key result is that q is not a sufficient statistic for aggregate investment; indeed, investment Granger causes some important components of q. This suggests that market prices are not infonnationally efficient; fums hoard information which is then released through their publicly observable actions.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:504743 |
| Date | January 2007 |
| Creators | Roache, Shaun K. |
| Publisher | Birkbeck (University of London) |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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