Three essays in asset pricing

In the first chapter, we consider a consumption-based asset pricing model where housing is explicitly modelled both as an asset and as a consumption good. Non-separable preferences describe households' concern with composition risk, that is, fluctuations in the relative share of housing in their consumption basket. Since the housing share moves slowly, a concern with composition risk induces low frequency movements in stock prices that are not driven by news about cash flow. Moreover, the model predicts that the housing share can be used to forecast excess returns on stocks. We document that this is indeed true in the data. The presence of composition risk also implies that the riskless rate is low which further helps the model improve on the standard CCAPM. The second chapter explores the link between the composition of firm's capital holdings and stock returns. I develop a general equilibrium production economy where firms use two factors, real estate capital and other capital, and investment is irreversible. Real estate depreciates slowly, this makes real estate investment riskier than investment in other capital. Firms with high real estate holdings are extremely vulnerable to bad productivity shocks. In equilibrium, investors demand a premium to hold such a firm. This prediction is supported empirically: I find that the returns of firms with a high share of real estate capital exceed that for low real estate firms by 4-7% annually adjusted for exposures to the market return, size, value and momentum factors. The model also predicts countercyclical variation in the aggregate share of real estate in total capital, which is a moment of the state variables. A cross sectional investigation of the conditional CAPM, where the change in aggregate share of real estate in total capital is used as the conditioning variable, delivers substantially improved results over its unconditional version. In the third chapter, we consider asset pricing in a simple general equilibrium production economy with two types of productivity shocks. The economy is hit by aggregate productivity shocks, and firms also experience firm-specific productivity shocks. We find that the firm-specific shocks effect firms' exposure to aggregate productivity shocks and therefore lead to differences in risk and expected returns among firms. Low productivity firms turn out to be small value firms and the high productivity firms turn out to be large growth firms in this economy. Simulations show that the model simultaneously generates positive and countercyclical equity premia and value premia.