Essays in finance and macroeconomics

This dissertation is a collection of essays relating to asset pricing. The first two essays study the effect of home mortgages on asset prices. The first essay is motivated by Equity Premium Puzzle of Mehra and Prescott. It studies a life cycle economy with home mortgages in it. They key finding is that model is able to generate equity premium consistent with US data for reasonable parameterizations and the equity premium goes up as the agents leverage more to buy the houses.;The second essay builds on the theoretical findings in the chapter one. It empirically tests if the risk associated with home mortgages is a risk priced in US equity data. I use the log (debt-income) ratio associated with mortgages as the conditioning variable and test its ability to explain cross-section of equity returns. The key finding is that model is successfully able to explain the variation in average returns of 25 portfolios constructed using book to market value and size criterion for the sample period 1982:I to 2005:IV. Further, the variation not explained by model is not attributable to firm specific characteristics like size.;The third essay looks at the present value relation for asset pricing. It re-examines the volatility puzzle using net cash flows, instead of aggregate dividends. The net cash flows are defined as aggregate dividends plus dollar value of share repurchases (net of share issues). The data used is for firms listed on Dow Jones Industrial Average (DJIA) for the sample period 1983:I to 2005:IV. The finding is that prices are not too volatile for several individual firms as well as for a portfolio comprising of 26 firms out of 30 firms currently listed on DJIA. The essay concludes with several possible explanations for this finding.