Essays in Financial Economics.

Summary This thesis consists of four self-contained chapters aimed at contributing to a better understanding of asset price formation and dynamics in a consumption-based model of financial asset pricing (C-MEDAF). Chapter 1 examines the term structure of stock returns in the main C-MEDAF models and shows that allowing consumption and dividend flows to be negatively affected by volatility shocks as observed empirically ("leverage effect") could make short-term assets riskier than long-term assets as recently found in some empirical studies. This modification gives these models more flexibility to capture different forms of the term structure of risky asset rates of return while respecting the observed levels of the risk premium and the risk-free rate of return. Chapter 2 proposes a regime-switching model to accommodate the changing behavior of the slope of the term structure of risky asset returns as observed in the data. We show that such a model allows combining regime-specific properties of one-regime models such as a positive or negative average slope of the term structure of returns, and gives more flexibility in the shape of the term structure of risky asset returns. Chapter 3 studies the equity market expectations hypothesis. According to this hypothesis, current returns on long-term assets are a weighted average of the expectation of future short-term returns. This test was mainly performed on the Treasury bill market and in many cases rejected. This hypothesis is not rejected in the equity market, but future returns are also predictable. Chapter 4 examines estimation and inference in the long-run risk model using the generalized method of moments.