Essays in macro-finance

Tirskikh, Mikhail (2019) Essays in macro-finance. Doctoral thesis, University of London: London Business School.

Abstract

The broad focus of this thesis is on the interaction between bond and equity markets with the macroeconomy. In particular, the first chapter studies the link between asset price fl uctuations and the labor market. It shows that taking into account risk premia dynamics helps to explain jobless recoveries in the US. Such recoveries were observed after the last three recessions and they were characterized by a very sluggish recovery of the labor market. This paper attributes the jobless recovery phenomenon to persistent increases of risk premia during the corresponding recessions. To study the role of risk premia in the labor market recoveries, I build and calibrate a general equilibrium model of the labor market with endogenous risk premia. I show that a simulation of the model with realistic dynamics of equity risk premia can reproduce jobless recoveries after the last three recessions and it can also reproduce fast labor market recoveries in the earlier period, consistent with the data. In the second chapter, we (with co-authors) use term structure of interest rates to identify the effects of different types of uncertainty on the macroeconomy. In particular, we construct and estimate a dynamic stochastic general equilibrium model that features demand- and supply-side uncertainty. Using term structure of interest rates and macroeconomic data, we find sizable effects of uncertainty on risk premia and business cycle uctuations. Both demand-side and supply-side uncertainty imply large contractions in real activity and an increase in term premia, but supply-side uncertainty has larger effects on infl ation and investment. In addition, we introduce a novel analytical decomposition to identify different risk propagation channels through which uncertainty affects the economy. Finally, in the third chapter I study how changes in the government policy uncertainty affect equity risk premium. I present empirical evidence that uncertainty about fiscal and monetary policy forecasts future excess market returns. Then I rationalize these findings within a general equilibrium asset pricing model with endogenous long run risk.