Essays in Asset Pricing

Abstract

I investigate determinants of equity and bond returns. In Chapter 2, I link product pricing behavior to firms' equity returns. Firms with less responsive product pricing earn higher average returns. I show this empirical fact is consistent with firms with less responsive pricing experience greater cashflow losses due to inflation, and investors demanding a risk premium to hold these firms' equity. In Chapter 3, my coauthors and I revisit several puzzling results in the literature that claim a disconnect between firms' asset returns and market leverage. We combine market values of bonds and loans from several data sets to comprehensively measure firms' market leverage and asset volatility. We show that the disconnect between asset returns and leverage is primarily due to the mismeasurement of market debt values with book debt values, and that popular models in the finance literature more accurately predict returns when market values are directly observed. In Chapter 4, my coauthors and I show that asset price movements around FOMC announcements are predicted by preceding ECB announcements.