Type of Document Dissertation Author Ozer, Gorkem URN etd-06202005-181852 Title Volatility Linkages in Growth and Asset Pricing Degree Doctor of Philosophy Department Economics, Department of Advisory Committee
Advisor Name Title Paul M. Beaumont Committee Chair Alec Kercheval Committee Member Stefan C. Norrbin Committee Member Thomas W. Zuehlke Committee Member Keywords
- Signal Extraction
- Natural Resources
- Economic Growth
- Moving Window
- Projection Methods
- Equity Premium
Date of Defense 2005-06-16 Availability unrestricted AbstractThe relationship between economic growth and
volatility has been the subject of numerous theoretical and empirical studies in economics.
In Chapter 2, I review this extensive literature. Key among the empirical results are the Ramey and Ramey (1995) result that volatility has a negative effect on growth and the Sachs and Warner (1995) result that resource rich countries grow relatively more slowly than other countries. These two findings motivated us to examine whether the volatility effect on growth is sensitive to the natural resource endowment. These results are presented in Chapter 3 where we also extend Ramey and Ramey (1995) by using time varying volatility and moving window volatility measures and also by
exploring alternative control variable sets. Although we do not confirm all of the results of Ramey and Ramey (1995), we conclude that the effect of volatility on growth is robust to the inclusion of natural resource endowments, different control variables, and different volatility formulations.
In Chapter 4, we explore the role of various sources of variation on asset prices. Specifically, we examine the effect of the noisy earnings reports on the equity premium in an asset pricing model. In our model, consumers make their investment decisions based on preliminary announcements of earnings reports and after the revisions are made by the release of the actual earnings reports they make their consumption decisions. Consequently, the stochastic discount factor used for asset price determination is based on the preliminary announcements rather than the true earnings process. The variance of the revisions plays an important role in the decisions of the consumers. If the variance of revisions is high the agents will tend to ignore the announcements and rely on the mean of historical earnings realizations. This tends to smooth the
stochastic discount factor in the pricing equation which has the impact of reducing the equity premium in the model. Therefore, the
equity premium puzzle is even more severe than reported by Mehra and Prescott (1985) when imperfect earnings forecasts are accounted for
and consumers face a signal extraction problem in earnings.
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