Abstract :
[en] This dissertation consists of three chapters based on three applied theory papers, which all use microfoundations to study mechanisms behind asset prices in the context of monetary policy and financial stability.
Market Fragility and the Paradox of the Recent Stock-Bond Dissonance. The objective of this study is to jointly explain stock prices and bond prices. After the Lehman-Brothers collapse, the stock index has exceeded its pre-Lehman-Brothers peak by 36% in real terms. Seemingly, markets have been demanding more stocks instead of bonds. Yet, instead of observing higher bond rates, paradoxically, bond rates have been persistently negative after the Lehman-Brothers collapse. To explain this paradox, we suggest that, in the post-Lehman-Brothers period, investors changed their perceptions on disasters, thinking that disasters occur once every 30 years on average, instead of disasters occurring once every 60 years. In our asset-pricing calibration exercise, this rise in perceived market fragility alone can explain the drop in both bond rates and price-dividend ratios observed after the Lehman-Brothers collapse, which indicates that markets mostly demanded bonds instead of stocks.
Time-Consistent Welfare-Maximizing Monetary Rules. The objective of this study is to jointly explain capital prices, bond prices and money supply/demand. We analyze monetary policy from the perspective that a Central Bank conducts monetary policy serving the ultimate goal of maximizing social welfare, as dictated by a country's constitution. Given recent empirical findings that many households are hand-to-mouth, we study time-consistent welfare-maximizing monetary-policy rules within a neoclassical framework of a cash-in-advance economy with a liquidity-constrained good. The Central Bank performs open-market operations buying government bonds in order to respond to fiscal shocks and to productivity shocks. We formulate the optimal policy as a dynamic Stackelberg game between the Central Bank and private markets. A key goal of optimal monetary policy is to improve the mixture between liquidity constrained and non-liquidity constrained goods. Optimal monetary responses to fiscal shocks aim at stabilizing aggregate consumption fluctuations, while optimal monetary responses to productivity shocks allow aggregate consumption fluctuations to be more volatile.
Jump Shocks, Endogenous Investment Leverage and Asset Prices: Analytical Results. The objective of this study is to jointly model leveraging and stock prices in an environment with rare stock-market disaster shocks. Financial intermediaries invest in the stock market using household savings. This investment leveraging, and its extent, affects stock price movements and, in turn, stock-price movements affect investment leveraging. If the price mechanism is unable to absorb a rare stock-market disaster, then with leverage ratios of 20 or more, financial intermediaries can go bankrupt. We model the interplay between leverage ratios and stock prices in an environment with rare stock-market disaster shocks. First we introduce dividend shocks that follow a Poisson jump process to an endowment economy with pure exchange between two types of agents: (i) shareholders of financial intermediaries that invest in the stock market ("experts"), and (ii) savers, who deposit their savings to financial intermediaries (households). Under the assumption that the households and the so called "experts" both have logarithmic utility, we obtain a closed-form solution for the endowment economy. This closed-form solution serves as a guide for numerically solving the model with recursive Epstein-Zin preferences in continuous-time settings. In our extension we introduce production based on capital investments, but with adjustment costs for investment changes. Jump shocks directly hit the productive capital stock, but the way they influence stock returns of productive firms passes through the leveraging channel, which is endogenous. The production economy also has endogenous growth, and investment adjustment costs partly influence the model's stability properties. Importantly, risk has an endogenous component due to leveraging, and this endogenous-risk component influences growth opportunities, bridging endogenous cycles with endogenous growth. This chapter is part of a broader project on financial stability. Future extensions will include an evaluation of the Basel II-III regulatory framework in order to assess their effectiveness and their impact on growth performance.
