Essays in financial economics

Clara, Nuno (2020) Essays in financial economics. Doctoral thesis, University of London: London Business School.

Abstract

This dissertation is composed of three Essays in Finance. In the first chapter, I study heterogeneity in demand elasticities as a source of risk in asset pricing. I use high-frequency product price and quantity data from Amazon to overcome the classical endogeneity challenge and estimate demand elasticities for a large cross-section of firms. I find that firms facing more elastic demands are riskier and this is reflected in higher equilibrium average stock returns (6.2% annual return premium). I show that price stickiness contributes to these differences in risk: firms are slow to react to competitors' price changes (compared to the predictions of a Calvo model). My empirical findings show the importance of having heterogeneous demand elasticities and degrees of price stickiness in macro-finance models. In the second chapter we study mortgage debt designs aimed at stabilizing the macroeconomy. We use a calibrated life-cycle model with competitive risk-averse lenders, and consider an adjustable-rate mortgage (ARM) with an option that during recessions allows borrowers to pay only interest on their loan and extend its maturity. We find that this option has several advantages: it stabilizes consumption growth over the business cycle, shifts defaults to expansions, and lowers the equilibrium mortgage rate by stabilizing cash flows to lenders. In the last chapter we document a decreasing pattern in product concentration within multiproduct firms since the early 2000s. Larger firms are increasingly selecting a more diverse product range outside of their core competence. Expanding firm boundaries is closely intertwined with rising industry concentration as industry leaders are consolidating market power by growing horizontally through product creation. We build a general equilibrium model of multi-product firms featuring endogenously fluctuating firm and industry boundaries and find that external financing costs are quantitatively important for explaining the negative relation between product and industry concentration.