Essays in asset pricing

This dissertation presents three essays which involve asset pricing puzzles. In two essays, I propose models which provide an explanation to different outstanding asset pricing puzzles in the literature. In another essay, I uncover yet another asset pricing puzzle.; The first essay expands upon both Abel's (1990) “catching-up-with-the-Joneses” model and Epstein and Zin's (1989) recursive utility specification by combining them into a single, tractable framework. The resulting model greatly improves our ability to explain asset returns under plausible preference parameters. Most of the improvements originate from the recursive specification of preferences.; The second essay seeks to analyze the extent to which the real estate premium can be explained by different preferences and by incorporating proportional transaction costs. In a frictionless setting, results show that the co-movement between consumption growth and real estate returns is not sufficient to justify the real estate premium under plausible preference parameters. I call this the “Real Estate Premium Puzzle.” This result is consistent for the various preferences considered. When proportional transaction costs are incorporated into the analysis, the puzzle disappears for the generalized expected recursive utility specification under certain sets of transaction costs and plausible preference parameter values. The puzzle continues to persist for other utility specifications even under these market frictions.; The third essay uses prospect theory to provide a coherent explanation for the international diversification puzzle. We use a life-cycle model with prospect theory to solve numerically for the optimal allocation of assets when they consist of foreign risky, domestic risky and risk-free assets. Simulation results indicate that under plausible preference parameters, investors hold all of their assets domestically. This is consistent with what is observed in the data. Our findings are robust for the different education groups considered as well as the different countries used in the analysis.