| My dissertation investigates the driving forces behind the time-series movements and the cross-sectional variation of asset prices and stock returns. It contains three chapters.;Chapter two documents that hiring predicts stock returns in the cross-section of US publicly traded firms even controlling for well documented return predictors such as investment, size, book to market, momentum, net stock issues, accruals, asset growth and profitability. A production-based asset pricing model with costly adjustment in labor and capital explains this fact. The model also implies that hiring (investment) is more informative about future returns for labor intensive (capital intensive) firms, which is verified in the US data. It also documents that over our sample period from 1973 to 2006, the predictive power of the hiring rate for asset returns has increased over time while the predictive power of the investment rate has decreased over time. It relates this finding to the rise in the services sector (labor intensive) observed in the US economy during the sample period.;Chapter three studies both quantity dynamics and asset prices fluctuations in a production economy with Epstein-Zin (1989) preferences and capital adjustment costs. It has two main findings: (i) change in elasticity of inter-temporal substitution not only affects the quantity dynamics, but also affects the asset prices and returns as well; (ii) Epstein-Zin preferences and capital adjustment costs are not sufficient to generate sizable equity premium.;Chapter one investigates the relations between firms' technological progress and the cross section of stock returns. Using a dynamic equilibrium model with production, it rationalizes many well-documented empirical regularities, including: (i) high R&D-intensive firms have higher average stock returns than low R&D-intensive firms, and earn higher excess stock returns after controlling for size and book-to-market ratio; and (ii) high physical investment-intensive firms have lower average stock returns than low physical investment-intensive firms, and earn lower excess stock returns after controlling for size, book-to-market ratio, and price momentum. The model also provides a novel explanation for the value premium, which is different than the explanations presented in the existing literature. |
