Essays in Macroeconomics and Finance

Abstract

This dissertation consists of three independent chapters on the impact of investment risk on asset prices and macroeconomic outcomes. Chapter 1 studies the determinants of return comovement between the equity markets of different countries. My coauthor and I document and investigate theoretically a strong positive cross-sectional relationship between the share of an equity market held by U.S. investors and the return correlation of that market with the U.S. We argue that frictions impeding the cross- border holding of equity are key determinants of cross-border positions and equity market return correlations across countries. Chapters 2 and 3 study the impact of entrepreneurial risk on macroeconomic outcomes. Chapter 2 investigates the contribution of entrepreneurship to increasing U.S. wealth inequality. I document that, since 2000, the increase in the wealth shares of the top 0.1% and 1% groups of U.S. households is almost exclusively driven by private business owner-managers. I investigate theoretically the restrictions that cross-sectional moments of the wealth distribution imply for heterogeneity in expected returns across households. Chapter 3 studies the impact of entrepreneurial risk on interest rate dynamics. I document a strong negative relationship between riskfree rate fluctuations and measures of the relative performance of the U.S. noncorporate sector. I develop an asset pricing model featuring asymmetric cash-flow growth shocks to the entrepreneurial sector that can rationalize key features of the dynamics of the U.S. riskfree rate, including its negative comovement with the excess returns to both inside (actively-managed) and outside (diversified) entrepreneurial equity, and its weak correlation with aggregate valuation ratios.