Three essays on the macroeconomic implications of noise trader risk in financial markets

I present a general equilibrium overlapping generations model that can be used to explore comovements of macroeconomic variables such as output, hours worked, real wages, consumption, and asset prices.; A closed-form solution for optimal consumption and portfolio choice is presented in chapter 2. I show that aggregate consumption exhibits a stationary process but that an agent's individual optimal consumption follows a random walk process.; I discuss the welfare effects of noise-trader risk in financial markets. Sufficient conditions are derived for aggregate consumption to be lower when noise-trader risk is present than when noise-trader risk is absent. Additional risk generated by noise trading can reduce welfare, under the conditions provided in chapter 2, and part of that cost may be borne by rational investors. Social welfare costs of noise trading may be large if the noise component in aggregate stock prices is large.; In chapter 3, I show that individual consumption exhibits considerable sensitivity to the government transfers-cum-taxes policy, but aggregate consumption in an exchange economy does not respond at all to that policy. This implies that government policy serves as an insurance device for old agents; through assets markets an increase in transfers to young agents results in an increase in stock price and hence in precautionary savings by young agents. This increase in stock price compensates partially for an increase in taxes when agents are old; a redistribution effects of a tax cut with future liabilities exists.; Chapter 4 develops a model that can explain why output and hours worked are positively correlated while the wage is almost constant in response to technological shocks. I also explain why consumption and leisure move in opposite directions over cycles, which is a stylized fact over business cycles. My model provides a synthesis of Real Business Cycle theories and New-Keynesian theories as far as the aggregate labor market puzzles are concerned. Both theories are challenging to explain real wage rigidities in the aggregate labor market. A limitation of my analysis is that a one-sector "shmoo" economy has difficulty explaining more detailed aspects of economic fluctuations over business cycles. (Abstract shortened with permission of author.)...