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Theses Doctoral

Essays on Risk Appetite and Uncertainty

Xu, Nancy R.

This dissertation focuses on the identification of the dynamics of risk aversion (price of risk) and economic uncertainties (amount of risk) and their effects on both domestic and international asset markets. In the first essay, I study the differences between global equity return comovements and global bond return comovements and use a consistent and flexible asset pricing framework to motivate and quantify the role of various economic determinants in explaining the comovement difference. This study contributes to the recent debate on how shocks transmit across countries, and documents that the ``risk compensation'' channel plays a major role in affecting international comovements. In the second essay, I find that fundamental shocks (consumption growth) and cash flow shocks (dividend growth) comove procyclically. This new stylized fact helps explain the ``Duffee Puzzle'' (Duffee, 2005): stock returns and consumption growth covary procyclically, whereas the conventional wisdom and extant consumption-based asset pricing models suggest that returns respond to fundamental shocks more significantly in a bad economic environment. This research contributes to an under-explored area in the consumption-based asset pricing literature: the dynamics of the ``amount of risk''. I then explore the asset pricing implications of this procyclical source of amount of risk in a consumption-based workhorse model that allows for time-varying risk aversion. In my joint paper with Geert Bekaert and Eric Engstrom, we develop a new measure of time-varying risk aversion that is consistent with a dynamic no-arbitrage asset pricing model, using a wide range of observed asset moments, macro and option data. In addition, our findings formally support the close relationship between variance risk premium and risk aversion (as suggested in the literature), and propose a financial proxy to economic uncertainty, which is a more significant predictor of future economic growth than VIX and true economic uncertainty.

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More Information

Academic Units
Business
Thesis Advisors
Bekaert, Geert
Degree
Ph.D., Columbia University
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