Essays on the link between asset prices and economic fluctuations

• Author / Creator

  Dissanayake, Ruchith N

• The thesis consists of three essays on the link between asset prices and economic fluctuations. In Chapter 2, I explore asset pricing implications and macroeconomic dynamics of government spending shocks. I introduce a novel exogenous measure of government spending shocks using financial data. Although consumption and investment decrease in the long run, fiscal shocks cause contemporaneously low marginal utility states. Assets with high sensitivity to government spending shocks earn significantly higher expected returns, on average, compared to assets with low sensitivity to government spending shocks. I show that the government spending shocks disproportionately worsen the value of growth opportunities relative to the value of existing assets. I develop a dynamic stochastic general equilibrium model to explain these insights. In Chapter 3, I use financial data to measure trade induced productivity change and assess its effects on macroeconomic dynamics and equity returns. I find that trade induced productivity leads to high marginal wealth states since, in short-run, economy reallocates resources from consumption towards exports and investment. Assets with high sensitivity to the shock have lower expected returns since they deliver high returns when consumption is dear for investors. The negative risk premium is stronger within larger firms and high investment firms. In addition, I show that trade induced productivity contributes to economic growth, especially in the case of limited foreign import competition. In Chapter 4, we study how investment-specific technology shocks are priced in a large cross section of stocks from 33 countries. The investment premium is generally negative and often significant in developed countries with greater access to capital, better financial institutions, and higher product market competition, while it is largely insignificant or sometimes even significantly positive in emerging markets with opposite characteristics. The investment premium is related to, but not subsumed in, the value premium. Our results underscore the importance of economic development and allocative efficiency in the pricing of technological advances, and help reconcile the conflicting existing evidence from the U.S. market with different sample periods.

• Subjects / Keywords

  • Government spending
  • Factor model
  • Asset pricing model

• Graduation date

  Fall 2017

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/R3X34N58R

• License

  This thesis is made available by the University of Alberta Libraries with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.