Essays in Macro Finance

I study the link between capital markets and sources of macroeconomic risk. In chapter 1 I show that expected inflation risk is priced in the cross section of stock returns even after controlling for cash flow growth and volatility risks. Motivated by this evidence I study a long run risk model with a built-in inflation non-neutrality channel that allows me to decompose the real stochastic discount factor into news about current and expected cash flow growth, news about expected inflation and news about volatility. The model can successfully price a broad menu of assets and provides a setting for analyzing cross sectional variation in expected inflation risk premium. For industries like retail and durable goods inflation risk can account for nearly a third of the overall risk premium while the energy industry and a broad commodity index act like inflation hedges. Nominal bonds are exposed to expected inflation risk and have inflation premiums that increase with bond maturity. The price of expected inflation risk was very high during the 70's and 80's, but has come down a lot since being very close to zero over the past decade. On average, the expected inflation price of risk is negative, consistent with the view that periods of high inflation represent a "bad" state of the world and are associated with low economic growth and poor stock market performance. In chapter 2 I look at the way capital markets react to predetermined macroeconomic announcements. I document significantly higher excess returns on the US stock market on macro release dates as compared to days when no macroeconomic news hit the market. Almost the entire equity premium since 1997 is being realized on days when macroeconomic news are released. At high frequency, there is a pattern of returns increasing in the hours prior to the pre-determined announcement time, peaking around the time of the announcement and dropping thereafter.

Efficient Prices at Any Cost: Does Algorithmic Trading Deter Information Acquisition?

I demonstrate a powerful tension between acquiring information and incorporating it into asset prices, the two core elements of price discovery. As a salient case, I focus on the transformative rise of algorithmic trading (AT) typically associated with improved price efficiency. Using a measure of the relative information content of prices and a comprehensive panel of 37,325 stock-quarters of SEC market data, I establish instead that algorithmic trading strongly decreases the net amount of information in prices. The increase in price distortions associated with the AT “information gap” is roughly $42.6 billion/year for U.S. common stocks around earnings announcement events alone. Information losses are concentrated among stocks with high shares of algorithmic liquidity takers relative to algorithmic liquidity makers, suggesting that aggressive AT powerfully deters fundamental information acquisition despite its importance for translating available information into prices.

The Evolution of Chimpanzee Sanctuaries in the United States

Chimpanzees are native only to the jungles of equatorial Africa, but for the last hundred years, they have also lived in captivity in the United States, most commonly in biomedical research laboratories, but also at Air Force bases for experiments for the space program, at accredited and unaccredited zoos, at circuses, as performers in Hollywood and even in private homes and backyards as pets. But that has been gradually evolving over the last few decades, as more and more chimpanzees move to newly-established chimpanzee sanctuaries. That transition was already underway even before the announcement by the National Institutes of Health (NIH) last year that it will retire all of its remaining chimpanzees from labs to sanctuaries. By thoroughly examining the evolution of these sanctuaries leading up to that seminal decision, along with the many challenges they face, including money, medical care, conflicting philosophies on the treatment of animals and the pitfalls that have led other sanctuaries to the brink of ruin, we can take away a better understanding of why chimpanzee sanctuaries are needed and why caretakers of other animal species are now looking to the chimpanzee sanctuary movement as a model to show how animals can be cared for in retirement.