This thesis contains three essays. In the first essay, I provide new evidence on the failure of
the Q theory of investment. The Q theory implies the state-by-state equivalence of stock
returns and investment returns. However in the data, I find that investment and stock
returns are negatively correlated. I also show that a production economy with time-to-build
can explain these empirical facts. When I compute Q theory based investment returns
on simulated data of the time-to-build model, they are uncorrelated with simulated stock
returns, as in the data. Moreover, the model replicates the empirical negative correlation
between stock returns and investment growth which some researchers have interpreted as
evidence for irrational markets.
In the second essay, I analyze the equilibrium effects of investment commitment on asset
prices when the representative consumer has Epstein-Zin utility. Investment commitment
captures the idea that long-term investment projects require not only current expenditures
but also commitment to future expenditures. The general equilibrium effects of investment
commitment and Epstein-Zin preferences generate endogenously time-varying first and
second moments of consumption growth and stock returns. As a result, the first and
second moments of excess returns are endogenously counter-cyclical, excess returns are
predictable, and the equity premium increases by an order of magnitude. This paper
also offers novel empirical findings regarding the predictability of returns. In the real and
simulated data, the lagged investment rate helps to forecast the mean and volatility of
returns.
In the third essay, we embed a structural model of credit risk inside a consumption based
model, which allows us to price equity and corporate debt in a single framework.
Our key economic assumptions are that the first and second moments of earnings and
consumption growth depend on the state of the economy which switches randomly, creating
intertemporal risk, which agents prefer to resolve quickly because they have Epstein-
Zin-Weil preferences. Our model generates co-movement between aggregate stock return
volatility and credit spreads, consistent with the data, and potentially resolves the equity
risk premium and credit spread puzzles.
| Identifer | oai:union.ndltd.org:LACETR/oai:collectionscanada.gc.ca:BVAU.2429/2849 |
| Date | 11 1900 |
| Creators | Kuehn, Lars Alexander |
| Publisher | University of British Columbia |
| Source Sets | Library and Archives Canada ETDs Repository / Centre d'archives des thèses électroniques de Bibliothèque et Archives Canada |
| Language | English |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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