Essays in international finance and macroeconomics2008

This thesis consists of three essays in international finance and macroeconomics. In Chapter 1, I introduce rare disasters into an otherwise standard open-economy general equilibrium model and allow the disaster probability to be both time-varying and mean-reverting, I then can explain several macroeconomics and international finance puzzles in a single model. The puzzles include the equity premium puzzle, the risk-free rate puzzle, the forward discount puzzle, the excess volatility puzzle and the volatility mis-match puzzle. The model, when calibrated with plausible parameter values, can replicate many salient features in the stock price and exchange rate data. Finally, the asset pricing implications of rare disasters under the Epstein-Zin-Weil preferences are studied. In Chapter 2, I...