Essays in financial economics

Fernandes Gomes de Castro, Marcus (2025) Essays in financial economics. PhD thesis, London School of Economics and Political Science.

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Abstract

This thesis explores foundational questions at the intersection of economics and finance, combining theoretical modelling with applied econometrics to address long-standing issues in asset pricing, international macro-finance, and monetary economics. The first chapter develops a general equilibrium model with multi-asset international financial intermediaries to study jointly uncovered interest parity (UIP), uncovered equity parity (UEP), and the hedging role of exchange rates. By allowing intermediaries to take positions in both global bond and equity markets, the model offers a unified framework where exchange rate dynamics reflect balance sheet exposures across asset classes. It clarifies the joint determination of currency risk premia and equity returns, highlighting how currencies may or may not hedge global portfolios. The model delivers novel testable implications for the behaviour of exchange rates relative to international equity and bond flows. The second chapter focuses on financial econometrics, revisiting empirical puzzles surrounding the Euler equation and intertemporal substitution. It shows that official consumption data—typically smoothed and filtered—can severely distort estimations of the Euler equation, often yielding implausibly low or negative values for the slope. The chapter develops a flexible method to recover unfiltered consumption data, yielding more stable and economically reasonable estimations across specifications, data types, and asset-holder groups. These findings have direct implications for macro-finance models. The third chapter addresses empirical challenges in estimating the Phillips curve, a key component in macro and finance models with nominal dynamics. It proposes a multi-sector framework that incorporates heterogeneity in price stickiness, enabling more realistic nominal frictions. By leveraging sectoral variation that is orthogonal to monetary policy shocks and imposing cross-equation restrictions, the paper delivers robust and meaningful slope estimates. The results reconcile macro and micro evidence on price rigidity and offer insights into the transmission of monetary policy to nominal variables.

Item Type:	Thesis (PhD)
Additional Information:	© 2025 Marcus Vinicius Fernandes Gomes de Castro
Library of Congress subject classification:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Sets:	Departments > Finance
Supervisor:	Vayanos, Dimitri and Martin, Ian
URI:	http://etheses.lse.ac.uk/id/eprint/4868

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