Three essays on returns and the macroeconomy

Durand, Robert Bruce (1999) Three essays on returns and the macroeconomy. PhD thesis, Murdoch University.

Abstract

This thesis contains three essays. Each essay discusses an aspect of the relationship between the state of the economy and returns from investing in particular classes of assets.

Testing Multi-Factor Asset Pricing Models. Determination, Data Snooping and Delusion.

Two theoretical frameworks for the analysis of the effects of one or more variables on returns of financial assets are considered: Arbitrage Pricing Theory and Consumption Capital Asset Pricing Models. Using Popper’s (1972) principle of falsification to decide between the models, Consumption Capital Asset Pricing Models prove to be the preferred theoretical framework in which the impact of one or many variables on returns may be considered.

Whether tests of Consumption Capital Asset Pricing Models utilise a number of variables proxying for consumption, or consumption per se is used in the analysis, analysts must overcome potentially severe methodological challenges. If many state variables are used to proxy for consumption, the distribution of the maximal R , the potential for treating endogenous variables as if they are exogenous, and overlapping data samples bias the analysis towards Type I errors. The issue of whether market variables, such as size and price-to-book ratios, may function as state variables for consumption also needs to be addressed. Conversely, if consumption per se is used in analyses questions of definition and measurement error also need to be answered. Solutions to these problems are proposed. These solutions underpin the approaches that will be taken in the second and third essays in this dissertation.

Investment Opportunities and the Macroeconomy: Evidence from Australia

Are returns from fixed interest and equity investments inversely related to the economy? This essay uses quarterly fixed interest and equity return data, spanning the fourth quarter of 1983 to the fourth quarter of 1996, to examine the hypothesis that returns are relatively low in periods of high consumption and vice versa (Lucas (1978) and Breeden (1979)). The analysis in this essay rejects this hypothesis. Higher equity and short term fixed interest returns are associated with periods of increased consumption while returns of long term bonds behave in the way hypothesised. The essay finds evidence of flights to quality effects. Additionally, the yield curve has predictive power for future equity returns and consumption.

The Price of Residential Real Estate in Australia’s Capital Cities.

What moves house prices? This essay analyses changes in the price of established residential real estate in each of Australia’s State and Territory capital cities. The analysis establishes that each city has an unique relationship to the exogenous variables in the models (a short term bond return index, a long term bond return index, the All- Ordinaries Accumulation index and State Private Final Consumption expenditure). The analysis supports the conjecture that individuals treat housing as part of their investment portfolio.

Item Type:	Thesis (PhD)
Murdoch Affiliation(s):	Division of Business, Information Technology and Law
Notes:	Note to the author: If you would like to make your thesis openly available on Murdoch University Library's Research Repository, please contact: repository@murdoch.edu.au. Thank you.
Supervisor(s):	Krueger, Mark
URI:	http://researchrepository.murdoch.edu.au/id/eprint/51116

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