UBC Theses and Dissertations
Three essays in Macro Finance Corhay, Alexandre
The present thesis is a collection of three essays in Macro Finance. The first essay examines the effects of industry competition on the cross-section of credit spreads and levered equity returns. I build a quantitative model where firms make investment, financing, and default decisions subject to aggregate and firm-specific risk. Firms operate in heterogeneous industries that differ by the intensity of product market competition. Higher competition reduces profit margins and increases default risk for debtholders. Equityholders are protected against default risk due to the option value arising from limited liability. In equilibrium, competitive industries are characterized by higher credit spreads, but lower expected equity returns. I find strong empirical support for these predictions across concentration quintiles. Moreover, the calibrated model generates cross-sectional variation in leverage and valuation ratios in line with the data. The second essay provides new evidence that imperfect competition is an important channel for time varying risk premia in asset markets. To this end, we build a general equilibrium model with monopolistic competition and endogenous firm entry and exit. Endogenous variation in industry concentration generates countercyclical markups, which amplifies macroeconomic risk. The nonlinear relation between the measure of firms and markups endogenously generates countercyclical macroeconomic volatility. With recursive preferences, the volatility dynamics lead to countercyclical risk premia forecastable with measures of competition. Also, the model produces a U-shaped term structure of equity returns. The final essay explores the interactions between yield curve dynamics and nominal government debt maturity operations in a New Keynesian model with endogenous bond risk premia. Violations of debt maturity neutrality occur when the yield curve slope is nonzero in a fiscally-led policy regime. When the risk profiles of government liabilities differ, rebalancing the maturity structure changes the government cost of capital. In the fiscal theory, changes in discount rates affect inflation through the intertemporal government budget equation. When the yield curve is upward-sloping (downward-sloping), the fiscal discount rate channel implies that shortening the maturity structure has contractionary (expansionary) effects.
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