| This dissertation explores the idea that exogenous movements in the distribution of equity returns can drive business cycles fluctuations. In the Chapters 1 and 2, I focus on the second moment of these distributions and investigate whether higher uncertainty about the performance of financial firms worsens these firms' asymmetric information problems, reducing their ability to intermediate funds, and thus weakening aggregate economic activity. In Chapter 3, I expand the investigation by analyzing the economic consequences of changes in the whole distribution of returns.;In Chapter 1, I use a vector autoregression (VAR) with several aggregate variables to identify exogenous disturbances to financial uncertainty in the data. The VAR estimations show that these shocks generate sizable and persistent economic effects, such as a 1.5% drop in investment lasting for more than 2 years. Moreover, the contribution of financial volatility shocks to macroeconomic fluctuations varies substantially over time. On average, these shocks do not account for a large share of the variation in GDP, but they explain about 40% of the decrease in economic activity during the Great Recession.;Chapter 2 provides the theoretical foundations for the empirical analysis performed in Chapter 1. I build a dynamic stochastic general equilibrium model providing micro foundations for the use of dispersion of stock returns across firms as the empirical measure of uncertainty over time. Additionally, I derive from the model robust predictions about the impact of exogenous increases in financial uncertainty on several macroeconomic variables. These predictions are the identifying assumptions used in Chapter 1 to empirically identify shocks to financial volatility.;In Chapter 3, I shed light on the idea that what might drive business cycles is not only fluctuations on the riskiness of investments, but on the probability of extremely low returns. Then, I propose a model capable of both delivering negative credit supply shocks due to an increase in the probability of low returns and quantitatively matching the behavior of the observed distribution of stock market returns. |
