Preston, Andrew;
(2025)
Essays in Macroeconomics and Finance.
Doctoral thesis (Ph.D), UCL (University College London).
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Abstract
This thesis comprises three chapters pertaining to topics in macroeconomics and finance. The unifying theme which extends throughout is the impact of uninsurable idiosyncratic income risk on asset prices and the dynamics of the business cycle. Chapter 1 develops a theory of how TFP news shocks can impact the economy via a Keynesian supply channel. With frictional labour markets, bad TFP news reduces firms' incentive to post vacancies, worsening households' employment prospects. Households respond by accumulating liquid assets and cutting spending for precautionary reasons, triggering a recession that compounds the labour market downturn. This mechanism is outlined analytically and numerically in a heterogeneous agent New Keynesian model, with supporting local projection evidence presented. In Chapter 2, I develop a consumption-based asset pricing model with uninsurable job loss risk, and show that this key feature can resolve a number of macro-finance puzzles. Since job loss leads to a large decline in idiosyncratic consumption, agents become less willing to bear risk when jobs become more insecure. Consequently, risk aversion increases endogenously when job insecurity rises, generating high, countercyclical risk premia. The model's equity premium Euler equation can be estimated directly, producing a much more reasonable risk aversion estimate as compared to the standard CCAPM. The precautionary saving motive spurred by job loss risk means that the risk-free rate puzzle is avoided, and the model explains the cross-section of returns more effectively than several other consumption-based models. Chapter 3 builds upon the asset pricing model by embedding it in a heterogeneous agent New Keynesian model with endogenous unemployment risk. Equity is a risky asset in the model since aggregate shocks not only decrease dividends but also endogenously elevate the risk of job loss. The model also replicates the strong response of stock prices after a monetary shock.
| Type: | Thesis (Doctoral) |
|---|---|
| Qualification: | Ph.D |
| Title: | Essays in Macroeconomics and Finance |
| Open access status: | An open access version is available from UCL Discovery |
| Language: | English |
| Additional information: | Copyright © The Author 2025. Original content in this thesis is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International (CC BY-NC 4.0) Licence (https://creativecommons.org/licenses/by-nc/4.0/). Any third-party copyright material present remains the property of its respective owner(s) and is licensed under its existing terms. Access may initially be restricted at the author’s request. |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL SLASH UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10214458 |
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