Essays on the composition of aggregate wealth

This thesis studies two asset pricing puzzles related to composition of investors' wealth.;In the first essay, I study the "equity capital puzzle" observed by Bansal, Fang, and Yaron (2007): the fact that expanding sectors in the economy do not provide increasing risk-reward compensation to investors in spite of tying up larger fractions of their wealth in those sectors. I document the puzzle for broad definitions of net corporate payout (including all cashflows from the corporate sector) and aggregate wealth (including human capital). I then propose a continuous-time representative agent model with habit formation pricing kernel and heteroskedastic output processes for which sectoral share dynamics is linked to the state of the economy, solve it in semi-closed form and calibrate it to the data. My model has simple ingredients and can quantitatively account for the basic properties of the asset markets and the puzzle.;In the second essay, I study the composition effect of Duffee (2005): the procyclicality of the covariance between consumption growth and stock returns induced by the time-varying fraction of the stock market in the investors' portfolio. I show that the effect of the changing fraction of the stock market is offset by the opposite change in the volatility of corporate cash flows. The volatility of corporate earnings growth is countercyclical and its offsetting effect is strong enough to overturn the composition effect and to make the consumption growth countercyclical. This mechanism is also successful in explaining the appearance of the composition effect in the samples ending in 1999-2001 when the volatility changes did not match the large changes in the stock market fraction. The modeling implication of my finding is that if we want the consumption-based asset pricing models with several components of the investors' wealth to be immune from the composition effect and be consistent with the data, we need them to contain the same property of countercyclical volatility of cash flows.