Essays on macro-finance.

Zabczyk, Pawel (2009) Essays on macro-finance. PhD thesis, London School of Economics and Political Science.

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Abstract

This thesis is a collection of four essays dealing with issues on the verge of macroeconomics and finance. The first two chapters are joint with Bianca De Paoli. In the first one, we try to analyze factors causing risk premia to vary over time. The second one is an attempt to understand how these factors - manifesting themselves through swings in the desire to save for precautionary reasons - affect monetary policy. We show analytically that in endowment economies, procyclical recession expectations can 'outweigh' countercyclical changes in 'risk-aversion' - generating counterfactual risk-premium behavior. However, allowing shocks or habits to be sufficiently persistent, or explicitly accounting for the impact of habits on consumption, suffices to generate countercyclical recession risks and risk premia. We also show that taking note of precautionary saving motives justifies an accommodative policy bias in the face of persistent, adverse disturbances. Equally, policy should be more restrictive - i.e. 'lean against the wind' - following positive shocks. Both of these essays rely on approximate solutions to a simple, external habit model. In the third chapter, I derive closed form formulae for the model's solution. I then use these formulae to estimate the model and analyze its ability to jointly fit consumption growth and asset price data. I find no specification capable of simultaneously matching these data and argue that 'exotic' shock distributions are an unlikely panacea. In general, however, closed form formulae for asset prices cannot be derived analytically and need to be approximated. The final chapter proposes a method of doing exactly that. In contrast to several alternative approaches, the approximating function is not restricted to be a polynomial in state variables. This flexibility and efficient use of nested solutions can allow 'low-order' formulae to exceed the accuracy of higher-order perturbation approximations.

Item Type:	Thesis (PhD)
Uncontrolled Keywords:	Economics, General
Sets:	Collections > ProQuest Etheses Departments > Economics
URI:	http://etheses.lse.ac.uk/id/eprint/2349

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