Freeman, Mark Charles (1997) The impact of uninsurable risk on asset prices and optimal dividend policy. PhD thesis, University of Warwick.

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Abstract

This thesis examines whether two well documented financial market anomalies
- the "Mehra & Prescott puzzles" and the dividend controversy - can
be resolved by allowing for the effects of uninsurable risks. The dissertation
contains an extensive review of the theory of consumption based asset pricing
and the Mehra & Prescott puzzles. This provides more comprehensive
coverage of this material than any previous review of the area: see chapters 2
& 3. The role that uninsurable risk might play in resolving market anomalies
is clearly demonstrated. Three chapters of substantive original contribution
follow that examine: (i) the predicted equity premium when marketable and
nonmarketable risks are independent (ii) the potential relevance of aggregate
dividends to equilibrium asset prices in economies with idiosyncratic endowment
shocks and (iii) the response of the stock market and riskfree rate to
unemployment shocks. The main findings are: (i) Chapter 4: an integrated
approach to local proper risk aversion is presented and a new form of risk
aversion emerges naturally (ii) Chapter 4: it will not, in general, be possible
to make accurate quantitative predictions concerning the impact of a small
probability, high impact, negative shock to endowment ("unemployment")
on asset prices on the basis of current knowledge concerning investor preferences
(iii) Chapter 5: aggregate dividends are shown to play an important
role in helping individuals to consumption smooth in incomplete markets if
the level of aggregate investment is uncertain. The observed behaviour of
dividend smoothing and concentrating rights issues into times of economic
prosperity is consistent with the model that is presented (iv) Chapter 6:
the rise (fall) in the riskfree rate prior to "bad" ("good") unemployment
news does not appear to be consistent with precautionary savings behaviour.
It is concluded that, while incomplete market models have great theoretical
strength and some empirical support, 'Current applications of this theory
leave many issues unresolved.

Item Type:	Thesis or Dissertation (PhD)
Subjects:	H Social Sciences > HB Economic Theory
Library of Congress Subject Headings (LCSH):	Risk, Money market, Assets (Accounting) -- Prices, Dividends
Official Date:	August 1997
Dates:	Date Event August 1997 Submitted
Institution:	University of Warwick
Theses Department:	Warwick Business School
Thesis Type:	PhD
Publication Status:	Unpublished
Supervisor(s)/Advisor:	Steele, Anthony
Extent:	i, 368 leaves
Language:	eng

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