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Essays on Productivity Risks in Asset Pricing

Lee, Nam Gang
http://orcid.org/0000-0001-8295-6628
http://rave.ohiolink.edu/etdc/view?acc_num=osu1524165777996863

Abstract Details

2018, Doctor of Philosophy, Ohio State University, Economics.
This dissertation analyzes the effect of productivity risk on economic fluctuations and asset prices in a production economy. My analysis is based on the direct estimation of various specifications regarding productivity, a key driver of fluctuations in macro quantities and asset prices, and seeks to avoid being the error of reverse-engineering the exogenous productivity process to match asset-pricing data. In the first chapter, I investigate how to justify a sizable long-run consumption risk in a production economy. Informed by the permanent income hypothesis, I propose a non-stationary data generating process for U.S. productivity, which may have persistent trend growth shocks. Parameter estimates using the exact initial Kalman filtering technique are utilized in a standard production economy model with Epstein-Zin preferences. I find that the estimated persistent trend growth shocks to productivity are the key driver of such a sizable long-run consumption risk in the production economy, leading to a low risk-free rate and a higher equity premium. In the second chapter, I investigate whether uncertainty shocks to productivity can help explain a higher equity premium in a production economy. For this analysis, I propose data-generating processes featuring stochastic mean and volatility and then estimate them using the particle filtering technique. I find that uncertainty shocks are persistent only when conditional mean is constant while, once we allow for growth shocks being independent of uncertainty shocks, growth shocks soak up the most portion of the persistence of uncertainty shocks. Thus, uncertainty shocks to productivity have a very little to contribute to generating a sizable risk that the production economy faces. In the third, last chapter, I provide estimates of the relative importance of a shock to a positive macroeconomic event (an upside shock) and a shock to a negative macroeconomic event (a downside shock). The downside shock results in a more sizable long-run impact than the upside shock. I also find empirical evidence that the downside shock to productivity causes a sharp reduction in economic growth and asset prices, while the upside shock leads to a mild increase in economic growth and contributes little to asset prices. The implication of the asymmetry in productivity in a dynamic stochastic general equilibrium model is that the asymmetry makes a higher equity premium and a lower risk-free rate.
Pok-Sang Lam (Advisor)
Stephen Cosslett (Committee Member)
Robert De Jong (Committee Member)
133 p.
Economics
productivity risks; persistent trend growth shocks; long-run risks; upside and downside shocks; equity premium; production economy; positive and negative macroeconomic events

Recommended Citations

Citations

  • Lee, N. G. (2018). Essays on Productivity Risks in Asset Pricing [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1524165777996863

    APA Style (7th edition)

  • Lee, Nam Gang. Essays on Productivity Risks in Asset Pricing. 2018. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1524165777996863.

    MLA Style (8th edition)

  • Lee, Nam Gang. "Essays on Productivity Risks in Asset Pricing." Doctoral dissertation, Ohio State University, 2018. http://rave.ohiolink.edu/etdc/view?acc_num=osu1524165777996863

    Chicago Manual of Style (17th edition)

osu1524165777996863
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This open access ETD is published by The Ohio State University and OhioLINK.