Ali Lazrak

I present three essays on Information Economics. The first essay consists of analyzing high-frequency price dynamics around earnings announcements for the largest 1,500 U.S. stocks between 2011 and 2015. Price discovery following earnings surprises mostly occurs in the after-hours market, following the earnings announcement, and is generally complete by 10 a.m. Eighty percent of the price response to earnings surprises in the after-hours market occurs upon arrival of the first trades. Price reactions are largely explained by earnings surprises and not by order flow, consistent with the theoretical view that news can incorporate prices instantly. In the second essay, co-authored with Oliver Boguth and Vincent Grégoire, we show that in an effort to increase transparency, the Chair of the Federal Reserve now holds a press conference following some, but not all, Federal Open Market Committee announcements. Press conferences are scheduled independently of economic conditions and communicate little information. Evidence from financial markets demonstrates that investors lower their expectations of important decisions on days without press conferences, and we show that they shift attention away from these announcements. Both channels prevent effective monetary policy, as the committee is averse to surprising markets and aims to coordinate market expectations. Correspondingly, we show that announcements without press conferences convey less price-relevant information. In the third essay, co-authored with Adlai J. Fisher and Jinfei Sheng, we construct indices of media attention to macroeconomic risks including employment, growth, inflation and monetary policy. Attention rises around macroeconomic announcements and following changes in fundamentals over quarterly, annual, and business cycle horizons. The effect is asymmetric, with bad news raising attention more than good news. Increases in aggregate trade volume and volatility coincide with rising attention, controlling for announcements. Finally, changes in attention prior to the unemployment announcement predict both the announcement surprise and stock returns on the announcement day. We conclude that media attention to macroeconomic fundamentals provides useful information beyond the dates and contents of macroeconomic announcements.

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In this thesis, I explore the implications of investor information for asset returns in general equilibrium economies with production.In the first chapter, I study what determines the relationship between information quality and long-run risk in a Cox-Ingersoll-Ross type model with recursive preferences. Building on the recent work by Ai (2010), I separate the risk premium into the short-run and long-run components to highlight aspects of preferences that are important for this relationship. It is shown that the attitude towards temporal resolution of uncertainty determines the direction in which changes in information quality alter the compensation for long-run risk, while the elasticity of intertemporal substitution is important for the amplitude of this effect.In the second chapter, I investigate how incomplete information affects asset returns in a real business cycle model with Epstein-Zin preferences. In the model economy, productivity is altered by both transitory and permanent shocks. The representative agent observes movements in productivity but cannot perfectly distinguish their sources. As a result he must solve a signal extraction problem. This incomplete information model is found to be quantitatively consistent with some common observations about asset prices and aggregate quantities, including, for example, the equity premium, the risk-free rate, the price-dividend ratio and the dynamics of consumption and output. Furthermore, the model generates a downward sloping term structure of equity risk as empirically observed-namely, assets with short-duration of cash flows have larger risk premium and return volatility than assets with long-duration of cash flows.

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This thesis comprises two manuscripts which sequentially develop and testthe Rank-Wealth Model (RWM).The first manuscript constructs the RWM from basic economic principlesby assuming consumer good indivisibility. If consumer goods are indivisible,and one also assumes finite supply and homogeneous preferences, the resultantderived utility function of each individual will become their rank insociety. This is an important result for it can explain 'Keeping up with theJoneses' motives as well as generate a value function that in the aggregateclosely resembles Kahneman and Tversky's Prospect Theory (1979). TheRWM can therefore explain a number of nancial anomalies including theendowment effect, simultaneous gambling and insuring, lottery regressivityand sub-optimal diversification.The second manuscript tests some of the predictions that arise fromRWM. Using methodology similar to Kumar (2009) the second study beginsby confirming the previously documented observation that poor individualshold more lottery-type-stocks (LTS) than the rich. Next, tests of the RWMare conducted using a proxy variable that measures individual rank as well asthe Gini measure of wealth concentration. As expected, high LTS portfoliosdo underperform low LTS portfolios using standard risk metrics but thatdominance is reversed when rank is considered. The second manuscriptprovides empirical support for the RWM by showing that it may be fullyrational for the poorest individuals to concentrate their portfolio value intoa few stocks that have higher idiosyncratic risk and skewness even if the(conventional) risk-adjusted expected return of those stocks is negative.

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This thesis is comprised of two essays that investigate household consumption and portfolio choices in dynamic life cycle frameworks.In the first essay, I explain that stock market participation and stockholding are increasing in the level of education and financial wealth without relying on commonly used assumptions about differences in the cost of processing financial information among households. The key aspects of the model are recursive preferences, education attainment and stock market participation. Households with low risk aversion and high elasticity of intertemporal substitution (EIS) are more likely to exercise their education option, accumulate large wealth, invest in stock markets and invest heavily in stocks. These findings are consistent with three separate, but related, strands of the literature on i) household asset holding, ii) utility preferences based on household level financial data, and iii) utility preferences and education attainment. I find that, consistent with these studies, better educated households accumulate more financial wealth, hold a larger fraction of wealth in equity, have a higher EIS and are less risk averse than their less educated counterparts.In the second essay, I investigate the fact that the fraction of financial wealth invested in equity is increasing in financial wealth in the cross section of households, a known fact that contradicts existing theories in the literature. I show that the contemporaneous positive correlation between human capital and financial wealth values is increasing in the persistence of labor income shocks. While human capital and financial wealth independently have opposing direct effects on equity shares, human capital effects dominate if labor income shocks are highly persistent, generating increasing equity shares in financial wealth. Both a simple model and a realistically calibrated life cycle model of consumption and portfolio choice are shown to generate the results. The predictions are supported empirically using data from Panel Study of Income Dynamics. The essay shows that rising equity shares in financial wealth is a consequence of persistence in labor income shocks and its effects on the joint distribution of human capital, financial wealth accumulation and wealth composition in the cross section, and not a consequence of financial wealth effects alone, as commonly assumed.

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