Essays on Macro-finance and Asset Pricing

Abstract

This dissertation comprises two chapters studying how macroeconomics and the financial market are connected. In chapter one, I study how agents form inflation expectations across different forecast horizons and how the expectations formation affects the Treasury bond pricing. I analyze survey inflation forecasts and document that these forecasts deviate from full-information rational expectations (FIRE), and the deviation varies across forecast horizons. To reconcile the cross-horizon forecast behavior, I propose a new subjective expectations formation model. Embedding the expectations model within a yield curve model, I explain several bond pricing puzzles with a uniform inflation belief story.The second chapter is based on the joint work with Anna Cieslak. We propose an approach to identifying economic shocks from asset prices, which allows us to study the drivers of asset prices at a daily frequency since the early 1980s. We apply the identification to examine investors’ responses to news from the Fed and key macro announcements.