Essays on macroeconomics and asset pricing
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My dissertation consists of three essays. The first essay offers empirical evidence and theoretical rationale for the negative relationship between growth in hours, the intensive margin of labor input, and equilibrium equity returns at the firm-level. An aggregate shock that lowers adjustment cost, the adjustment cost shock, redistributes output from consumption to investment in the economy. Hence, firms adjusting hours more benefit more from their lowered adjustment costs and pay out more consumption when the aggregate marginal utility is high. These firms are thus less risky and associated with lower equilibrium equity returns. At the aggregate-level, the adjustment cost shock recovered from the data is a macroeconomic shock in business cycles and systematic risk from the equity market. At the micro-level, it affects a firm’s outcomes via the firm’s labor input choices.
The second essay investigates the economic mechanism that firms optimally implement full- and part-time labor substitution in business cycles. Firms replace full- with part-time labor to reduce their compensation costs when their outputs are low. Therefore, firms with a low part-time labor share have a real option that hedges their values against unfavorable macroeconomic conditions. Empirical results show that firms with a lower part-time labor share hire more part-time labor in economic downswings and earn lower equity returns in equilibrium.
The third essay studies the asset pricing implications from the leisure formation process of a representative agent. The leisure formation process combines and weighs realized and expected leisure measures. If the utility function is non-separable between leisure and consumption, the equilibrium intertemporal marginal rate of substitution increases when the leisure-consumption ratio increases. The structural estimation of the model using U.S. postwar aggregate data produces reasonable equilibrium coefficients. In asset pricing exercises, the model-implied stochastic discount factor performs as well as the three-factor model. In conditional asset pricing models, the leisure-consumption ratio provides a better approximation of risk prices than the consumption-wealth ratio.