| Chapter One develops a continuous-time general equilibrium model in a representative exchange economy with incomplete information. We show, in a multiple assets setting, that state uncertainty risk is priced and commands additional (state-dependent) premium. Moreover, noisier stocks/firms respond more strongly to uncertainty shocks, which may help rationalize size and book-to-market effects. We test our model using the ASA-NBER survey of professional forecasters, GDP growth rate data, and Fama-French size and book-to-market portfolios. The empirical evidence is largely consistent with the model's predictions. The estimated uncertainty risk premium is both statistically and economically significant (over 4% per year), and the Fama-French factors lose explanatory power for the cross-sectional returns after controlling for the uncertainty risk.;Goyal and Santa-Clara (2003) find a significantly positive relation between the equal-weighted average stock variance and the value-weighted portfolio returns on the NYSE/AMEX/Nasdaq stocks for the sample period of 1963:08 to 1999:12. In Chapter Two, we show that this result is driven by small stocks traded on the Nasdaq, and is in part due to a liquidity premium. In addition, their result does not hold for the extended sample of 1963:08 to 2001:12. More importantly, we find no evidence of a significant link between the value-weighted average stock variance measure and the value-weighted portfolio returns. After screening for size, liquidity, and price level, we find no evidence of a significant link between any of the risk measures and the excess market return.;In Chapter Three we provide approximate general solution to Epstein-Zin investors' consumption and portfolio choice problems in a continuous-time setting, when the expected asset return is time-varying. The log of the optimal consumption-wealth ratio is a quadratic function of the expected excess return, and the hedging demand of the risky asset is linear in the expected excess return. Using the US stock market data, we show that the hedging demand is important, but not a dominant factor. We compare our model with models that characterize different aspects of the investment opportunity set. Given the calibrated parameters, the time-varying return and volatility seem to affect the portfolio choice to a comparable extent. |
