In the first chapter of this dissertation, I uncover an economic source of exposure to global risk that drives international asset prices. Countries which are more central in the global trade network have lower interest rates and currency risk premia. As a result, an investment strategy that is long in currencies of peripheral countries and short in currencies of central countries explains unconditional carry trade returns. To explain these findings, I present a general equilibrium model where central countries’ consumption growth is more exposed to global consumption growth shocks. This causes the currencies of central countries to appreciate in bad times, resulting in lower interest rates and currency risk premia. In the data, central countries’ consumption growth is more correlated with world consumption growth than peripheral countries’, further validating the proposed mechanism.

In the second chapter of this dissertation (with Hanno Lustig), we show that measures of distance explain exchange rate covariation. Exchange rates strongly co-vary across currencies against a base currency (e.g., the dollar). We uncover a gravity equation in the factor structure: The key determinant of a currency’s exchange rate (e.g., the CHF/USD) beta on the common base factor (e.g., the dollar factor) is the distance between this country (e.g., Switzerland) and the base country (e.g., the U.S.): the farther the country, the larger the beta. Shared language, legal origin, shared border, resource similarity and colonial linkages significantly lower the betas. On average, the exchange rates of peripheral countries tend to have high R2s in factor regressions, while central countries have low R2s. If the pricing kernel loadings on global risk factors are more similar for country pairs that are closer, a no-arbitrage model of interest rates and exchange rates replicates this distance-dependent factor structure.

In this dissertation, I investigate the context and emergence of Jane Austen’s novels as operatic source material, with a particular focus on the transformation of her third novel for Jonathan Dove and Alasdair Middleton’s Mansfield Park opera. I consider the mutable concept of fidelity both as it relates to historically informed staging, costuming, and deportment and to the transfer of an original work to a new medium. I have assembled passages from etiquette and conduct manuals from the Regency period in order to assist current performers and directors in infusing greater believability into their performances through an understanding of the social nuances and distinct physicality that characterized the British gentry class of the early nineteenth century. Reflections by composers Rachel DeVore Fogarty (Persuasion), John Morrison (The History of England), Daniel Nelson (Pride and Prejudice), and Aferdian Stephens (Sense and Sensibility); by librettists Marella Martin Koch (Sense and Sensibility) and Douglas Murray (Persuasion); and by composer/librettist Kirke Mechem (Pride and Prejudice) offer further insight into the adaptation process and into what makes Austen’s works rich terrain for creators of new opera.

I present a joint model of yield curves and macroeconomic variables with an explicit effective zero lower bound by employing the concept of shadow interest rates. Bond yields are derived by assuming no arbitrage opportunities. However, they are not affine due to the zero lower bound. I thus develop a new approximate bond pricing formula that is correct up to a second order. To describe macroeconomic dynamics, I employ a standard New Keynesian macroeconomic model and estimate the model parameters for the US and Japan.

In the first chapter, I conduct three different types of counterfactual analyses of monetary policy. First, I evaluate a counterfactual analysis of raising the target inflation level. For both the US and Japan, I find that a higher inflation target steepens the yield curve when the current policy interest rate is not constrained by the zero lower bound. On the other hand, a higher inflation target increases long-term nominal yields while keeping short-term nominal yields unchanged when the current policy interest rate is constrained by the zero lower bound. Second, I study the effect of suddenly ending the zero interest rate policy. Third, I examine the impact of introducing a negative interest rate on the bond markets and the macro economy.

In the second chapter, I investigate whether the empirical findings documented before the zero lower bound period holds during the zero lower bound period. For example, I study how macroeconomic risks impact the shape of yield curves by looking at their decompositions and their factor loadings.

In the third chapter, I conduct two additional exercises. First, I incorporate a Markov regime switching feature into a New Keynesian macro finance model with the zero lower bound for nominal bond pricing. Second, I study the excess sensitivity of long-distant real forward interest rates to changes in the short-term nominal interest rate using a dataset of Japanese fixed income investors.

This dissertation focuses on a major challenge to asset pricing theory: the valuation of mortgage-backed securities.

In the first chapter of this dissertation (with Mikhail Chernov and Francis A. Longstaff), we develop a three-factor no-arbitrage model for valuing mortgage-backed securities in which we solve for the implied prepayment function from the cross-section of market prices. This model closely fits the cross-section of mortgage-backed security prices without needing to specify an econometric prepayment model. We find that implied prepayments are generally higher than actual prepayments, providing direct evidence of significant macroeconomic-driven prepayment risk premiums in mortgage-backed security prices. We also find evidence that mortgage-backed security prices were significantly affected by Fannie Mae credit risk and the Federal Reserve’s quantitative easing programs.

In the second chapter, I study the relationship between funding liquidity and the valuation of mortgage-backed securities. Most of the financing for mortgage-backed securities occurs through a trade known as a dollar roll, the simultaneous sale and purchase of forward contracts on mortgage-backed securities that is analogous to a repurchase agreement. I develop a four-factor no-arbitrage model for valuing mortgage-backed securities that allows for the valuation of dollar rolls. Unlike previous models of the dollar roll, I allow for the possibility of a prepayment risk premium. I develop a new measure of mortgage specialness that is independent of prepayment risk premia and agency credit spreads. I find that specialness is related to measures of balance sheet constraints and primary dealer positions in mortgage-backed securities.

Chapter one---Risk Sharing and the Term Structure of Interest Rates

I propose a general equilibrium model with heterogeneous investors to explain the key properties of the U.S. real and nominal term structure of interest rates. I find that differences in investors' willingness to substitute consumption across time are critical to account for nominal and real yields dynamics. When the endogenous amount of credit supplied by risk-tolerant investors is low, the aggregate price of risk and the real interest rate are high. Thus, real bonds are risky. I study nominal bonds under both exogenous and endogenous (Taylor rule) inflation. I find that when the Taylor loading on inflation is greater than one, the nominal term structure is upward sloping regardless of the correlation between nominal and real shocks. I use the model to shed light on two salient interest rate puzzles: (1) the secular decline of long-term real and nominal rates since the 1980s, and (2) the sudden spike in real yields at the height of the Great Recession.

Chapter 2---Endogenous and Exogenous Risk Premia

In this second chapter, I investigate how levered balance sheets amplify the effects of exogenous aggregate volatility shocks on asset prices. Risk premia are determined by the interaction of exogenous time-varying fundamentals with the endogenously determined levered balance sheets. When macro-volatility shocks hit the economy, asset prices decline, levered agent loses relatively more net worth and aggregate risk aversion rises endogenously. I find that this feedback between balance sheets and macro-volatility produces six times more volatile premiums than an economy with only cash flow shocks, thus improving the model's ability to match the data. However, the effects on investment and growth are mild.

Chapter 3---Liquidity Shocks, Business Cycles and Asset Prices

The third chapter is joint work with Saki Bigio. In the aftermath of the Great Recession, macro models that feature financing constraints have attracted increasing attention. Among these, Kiyotaki and Moore 2008 is a prominent example. In this paper, we investigate whether the liquidity shocks and financial frictions proposed by Kiyotaki and Moore 2008 can improve the asset pricing predictions of the frictionless RBC model. We study the quantitative business cycle and asset pricing properties in an economy in which agents feature recursive preferences, are subject to a liquidity constraint, and suffer liquidity shocks. We find that the model predicts highly nonlinear time variation and levels of risk premia, which are driven by endogenous fluctuations in equity prices. However, the model fails to account for a basic fact: Periods of scarce liquidity are associated with high asset prices and low expected returns.

Chapter 4---A Macrofinance View of U.S. Sovereign CDS Premiums

The forth and last chapter of the dissertation is joint work with Mikhail Chernov and Lukas Schmid. Premiums on U.S. sovereign CDS have risen to persistently elevated levels since the financial crisis. We ask whether these premiums reflect the probability of a fiscal default a state in which budget balance can no longer be restored by raising taxes or eroding the real value of debt by raising inflation.

We develop an equilibrium macrofinance model in which the fiscal and monetary policy stance jointly endogenously determine

nominal debt, taxes, inflation and growth. We show how CDS premiums reflect endogenous risk-adjusted fiscal default probabilities.

A calibrated version of the model is quantitatively consistent with the observed CDS premiums.

In the first chapter of this dissertation, I study the asset pricing implications of heterogeneity in the financial intermediary sector. To examine the impact of massive balance sheet adjustments within the intermediary sector during the Great Recession, I propose a dynamic model with heterogeneous intermediaries and financial frictions. The model implies that a significant fraction of risk premia variation can be attributed to the composition of the intermediary sector. Asset reallocations, comparable in magnitude to the one observed during the recent financial crisis, lead to a substantial increase in the risk premia and volatility. An empirical measure of the composition of the financial sector strongly forecasts future excess returns with significant additional predictive power beyond many established forecasting variables in the literature. Moreover, shocks to wealth distribution among intermediaries have strong explanatory power for the cross-section of assets and are priced with a positive price of risk.

In the second chapter of this dissertation (with William Mann), we estimate small marginal costs and large markups at private colleges in the United States. For identification, we exploit a tightening of credit standards in the PLUS loan program, which decreased enrollment, revenues, and expenditures at private colleges with low-income students. We estimate that markups represented more than half of charges for students disqualified by the change.

Markups were higher at for-profit schools, and in states with fewer public schools and lower education spending. Our results contrast prior estimates of small markups in higher education. We conclude that the positive relationship between federal student aid and rising tuition costs, the so-called Bennett Hypothesis, arises due to imperfect competition between colleges.