Date of Award

Fall 2022

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Economics

First Advisor

Barberis, Nicholas

Abstract

This dissertation consists of three self-contained essays studying asset prices movements. The first essay investigates the impact of beliefs on exchange rates movements. Motivated by the evidence of systematic forecast errors by market participants and professional forecasters, we construct an exchange rate determination model with two frictions. (1) each investor receives noisy private signals about the future path of interest rate differentials between the U.S. and other countries, and (2) they overestimate the persistence of interest rate differentials. The model can explain the failure of UIP found in the data and other regularities of exchange rate returns, highlighting the importance of investors' beliefs to exchange rate behavior. The second assesses the consequences of beliefs imperfections on stocks' prices. We use survey-based forecasts and the term structure of priced dividend claims to show evidence of investors' under-reaction and delayed over-reaction to output growth news. Motivated by this evidence, we show that a model where investors have heterogeneous and imperfect beliefs is consistent with the survey data on stock fundamentals and can account for the dividend claims evidence and several well-known stock price puzzles in the literature. The last essay proposes a conditional factor model for currency returns where the risk exposure evolves with the country's macroeconomic environment. We use Instrumented Principal Component Analysis (IPCA) to estimate the common risk structure of currencies and disentangle which macro characteristics are relevant for the cross-section of currency returns. The model is successful in explaining both realized variation in returns and differences in average returns across currencies. Estimated risk factors are correlated with the Dollar and Carry factors, but they still bring new information to the description of common risks. Exports exposures to commodities and US trade, credit over GDP, and interest rate differentials are the most relevant macro variables for explaining the loadings of currencies on these risk factors.

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