Essays in capital markets

In the first chapter, I provide evidence that investment-specific technological change is a source of systematic risk. In contrast to neutral productivity shocks, the economy needs to invest to realize the benefits of innovations in investment technology. A positive shock to investment technology is followed by a reallocation of resources from consumption to investment, leading to a negative price of risk. A portfolio of stocks that produce investment goods minus stocks that produce consumption goods (IMC) proxies for the shock and is a priced risk factor. The value of assets in place minus growth opportunities falls after positive shocks to investment technology, which suggests an explanation for the value puzzle. I formalize these insights in a dynamic general equilibrium model with two sectors of production. The model's implications are supported by the data. The IMC portfolio earns a negative premium, predicts investment and consumption in a manner consistent with the theory, and helps price the value cross section. In the second chapter, based on joint work with Igor Makarov, we use heteroscedasticity of stock returns as an identification tool to isolate four robust factors in the U.S. industry returns. The first factor can be viewed as a proxy for economy wide demand shocks. The second factor is a portfolio of stocks producing investment goods minus stocks producing consumption goods (IMC). The third factor differentiates between cyclical vs. non-cyclical stocks. Finally, the fourth factor is consistent with a proxy for shocks to input good prices. The extracted factors are shown to be important in explaining the cross-section of expected returns. Unlike the CAPM or the Fama and French three factor model, they successfully price the cross-section of 48 industry portfolios and do a good job at explaining the 25 Fama and French size and book-to-market portfolios.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2007

Author dc:creator

• Papanikolaou, Dimitris, Ph. D. Massachusetts Institute of Technology

Advisor dc:contributor.advisor

• Leonid Kogan.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/42335

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/42335