Essays on non-linear dynamics in macro-finance
This thesis studies how financial markets and the macroeconomy interact. It shows that even simple changes in how firms and investors behave can explain many of the puzzling patterns we see in asset prices and returns.
In the second chapter, we build a model in which companies mainly finance themselves with debt while the supply of shares is difficult to change. Using this model, we explain why stock returns move so much over time and differ between companies and industries. We show that leverage and financing choices can produce return patterns across business cycles that closely match those observed in the data.
In the third chapter, we develop a new methodology to estimate how investors value risk and future rewards without making strong assumptions about the information that they use to do this valuation. Using data for the United States from 1952 to 2019, the method finds more realistic values for key preference parameters than earlier approaches and avoids relying on simplified models.
In the fourth chapter, I extend a standard economic model by allowing the total number of assets to change over time. This adjustment makes asset prices more volatile and less predictable in the short run, which is closer to what we observe in the data.
Overall, the thesis shows that small departures from traditional assumptions, such as fixed asset supply, simple investor preferences, or ignoring corporate financing, can greatly improve our understanding of how the prices and returns of financial assets behave in response to macroeconomic conditions.