| dc.description.abstract |
<p>The three essays in this dissertation explore the role of fluctuations in aggregate
volatility and global temperature as sources of systemic risk. </p><p>The first essay
proposes a production-based asset pricing model and provides empirical evidence suggesting
that compensation for volatility risk is closely related to an unexplored characteristic
of a firm, namely, its reliance on skilled labor. I propose a model in which aggregate
growth has time-varying volatility, and linear adjustment costs in labor increase
with the skill of a worker. The model predicts that expected returns increase with
a firm's reliance on skilled labor, as well as compensation for fluctuations in aggregate
uncertainty. Consequently, a rise in aggregate uncertainty predicts an increase in
expected returns as well as in cautiousness in hiring and firing. This impact is larger
for firms with a high share of skilled workers because their labor is more costly
to adjust. I empirically test the implications of the model using occupational estimates
to construct a measure of a firm's reliance on skilled labor, and find a positive
and statistically significant cross-sectional relation between the reliance on skilled
labor and expected returns. Empirical estimates also show that an increase in aggregate
uncertainty leads to a rise in expected returns, and this impact is larger for firms
which rely heavily on skilled labor; thereby, a firm's exposure to aggregate volatility
is positively related to its reliance on skilled labor.</p><p>In the second and third
essay, co-authored with Ravi Bansal, we explore the impact of global temperature on
financial markets and the macroeconomy. In tho second essay we explore if temperature
is an aggregate risk factor that adversely affects economic growth. First, using data
on global capital markets we find that the risk-exposure of these returns to temperature
shocks, i.e., their temperature beta, is a highly significant variable in accounting
for cross-sectional differences in expected returns. Second, using a panel of countries
we show that GDP growth is negatively related to global temperature, suggesting that
temperature can be a source of aggregate risk. To interpret the empirical evidence,
we present a quantitative consumption-based long-run risks model that quantitatively
accounts for the observed cross-sectional differences in temperature betas, the compensation
for temperature risk, and the connection between aggregate growth and temperature
risks. </p><p>The last essay proposes a general equilibrium model that simultaneously
models the world economy and global climate to understand the impact of climate change
on the economy. We use this model to evaluate the role of temperature in determining
asset prices, and to compute utility-based welfare costs as well as dollar costs of
insuring against temperature fluctuations. We find that the temperature related utility-costs
are about 0.78% of consumption, and the total dollar costs of completely insuring
against temperature variation are 2.46% of world GDP. If we allow for temperature-triggered
natural disasters to impact growth, insuring against temperature variation raise to
5.47% of world GDP.</p>
|
|
