This dissertation is comprised of three essays in the areas of financial economics and macroeconomics. The general equilibrium nature of the macroeconomy is seen through the ways in which firms, govemments, and households interact in the labor, output, financial, and money markets. This dissertation focuses on two of the markets that comprise the macroeconomy; namely, the financial markets and the labor market. The essays examine how different sectors within the financial sector react to changes in the overall financial market, how movements in financial variables such as interest rates provide information on changes in economic activity, and how labor market conditions respond to unanticipated changes in real economic activity. Each essay also incorporates time series econometric techniques that allow me to analyze the interactions and responses of some macroeconomic variable(s) to changes in other macroeconomic variables. Following is a brief synopsis of each essay.
The first essay is entitled "Sector Index Returns and the Market: A New Study of Beta Stability." A number of studies have estimated beta's for a variety of securities and examined their stability over time, however, no study has focused on the betas of individual sector indexes. This is quite surprising given the proliferation of index investing over the last decade. I estimate betas for the returns on the S&P capital goods index, financial index, industrials index, transportation index, and utilities index, using the composite index as a proxy for the market. An underlying assumption of CAPM is that beta is inter-temporally stable. However, the underlying stucture of markets may change over time for a number of reasons (e.g., financial innovation, money supply shocks, deregulation, stock market crash, etc.). Some studies have suggested betas may be time-varying (Fabozzi and Francis, 1978; Brooks, Faff, and Ariff, 1998; Stokes and Neuburger, 1998). I perform a series of tests to check both the inter-pehod and intraperiod stability of these sector index betas over time. The analysis involves obtaining recursive and rolling regression estimates of the betas, and a number of diagnostic tests to detect stuctural breaks and auto-regressive conditional heteroscedasticity. The results enable me to identify periods of instability and stability, as well as changes in beta over time. I am able to attribute most of the major changes in sector index betas to particular economic events and, as such, provide investors with useful information about how future events are likely to affect these index returns.
The second essay is entitled "Differential Effects of Output Shocks on Unemployment Rates by Race and Gender" and focuses on how unanticipated changes in real output are transmitted to unemployment rates of different demographic groups. A common feature in many macroeconomic models is the connection between departures from some equilibrium rate of unemployment and the business cycle. The output gap can be related to the difference between the equilibrium (or "baseline") rate of unemployment and the actual unemployment rate using Okun's Law and, in fact, most empirical studies in this area use this as a starting point. Studies of these types include Evans (1989) and Koop et al. (1996), both of which incorporate vector auto regressions in their analyses. Hyclak and Stewart (1995) and Lynch and Hyclak (1984) are among the few studies that examine unemployment rates by race and gender. The former uses micro-data while the latter focuses on estimates of the natural rate. Through the use of the newly developed technique of generalized impulse response analysis (Pesaran and Shin, 1998), I measure the extent to which the behavior of unemployment rates for white males, black males, black females, and white females differ in response to real output shocks. My results suggest that these responses are larger and more persistent for blacks than whites, and for males than females. The findings are particularly important for understanding the impact of policy initiatives aimed at reducing the adverse effects of changes in output on employment.
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Three Essays In Applied Financial Economics And Macroeconomics
