Three essays on asset pricing studies
Abstract
Traditional consumption-based asset pricing models generally treat the aggregate
stock market as a claim to aggregate consumption. However, according to empirical
evidence, the majority of households consume primary out of wages and live with
no capital gains from risky investments, this implies potential omitted stock market systematic risk sources beyond aggregate consumption. Therefore, this thesis
contributes to investigating alternative pricing instruments other than aggregate consumption growth to capture omitted stock market systematic risks in the traditional
consumption-based capital asset pricing model (CAPM).
This thesis constructs three asset pricing models for wealth redistribution risks, asset
pricing effects of heterogeneous beliefs among wealth classes, and financial stress
risks. A new market systematic risk dimension is uncovered in each model and then
tested using U.S. stock market data.
This thesis firstly incorporates the elevated stockholder consumption volatility into
the long-run risk framework to account for wealth redistribution risks. The capital
variability factor (CRV) is developed to capture the accumulated short-run volatility
effects of wealth redistributive shocks. Secondly, this thesis derives the analytical
solution of stockholder consumption growth to account for stockholder consumption
risks using a robustness control approach. The stockholder consumption share factor
(SCS) is constructed to portray the stockholder consumption dynamics and affords
high asset pricing. Finally, this thesis utilises the long-run risk framework to factor
in that financial stress contributes to the convexity of the price-dividend ratio and,
therefore, serves systematic risks. The financial stress factor (FS) is developed to
explain the cross-sectional return variations of stocks with highly subjective valuations
and are difficult to arbitrage.
This thesis contributes to the field in multiple dimensions. This thesis attempts
to introduce economic variables into data-driven models, therefore shedding light
on the impact of limited participation of households in the stock market for future
research. Also, new market systematic risks are uncovered and counterpart asset
pricing factors are constructed. These findings are important to policymakers as
financial systems are especially vulnerable to systemic risk that cannot be hedged.