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Abstract

This thesis consists of three chapters. The first chapter endogenizes technological change by introducing a stylized innovation process driven by a R&D–dependent Poisson process in a Cox, Ingersoll and Ross (1985) production economy. The model reproduces some of the features of the long-run risk literature, that is, endogenous consumption growth departs slightly from the i.i.d. framework, and shocks to realized and expected consumption growth are priced in equilibrium. Equilibrium dynamics suggest the use of general investment based measures, such as the R&D-to-capital ratio, to identify the long-run risk component in aggregate consumption growth. The second chapter examines the impact of risk-based portfolio constraints on asset prices in a standard exchange economy model where agents have different risk aversion. Constrained agents scale down their benchmark portfolio and behave locally like power utility investors with risk aversion that depends on current market conditions. The equilibrium is characterized using the consumption share of the constrained agents and allows for explicit existence results. The imposition of constraints on active market participants dampens fundamental shocks when they bind, a result that challenges recent studies that suggest that risk management rules serve to amplify aggregate fluctuations. The results also dispute the belief that capital regulations make financial crises larger and more costly, as constraints are more likely to bind in bad times. Constraints may give rise to equilibrium asset pricing bubbles, a result that is associated to the risk aversion distribution across agents and the severity of the constraint. The third chapter studies a pure exchange economy with three types of agents: constrained agents are subject to portfolio constraints, unconstrained agents are free to choose the composition of their portfolio and face a standard nonnegativity constraint on wealth, and arbitrageurs, who are unconstrained, and may incur in marked-to-market losses which are bounded by a state-dependent constraint. This credit condition is valuable when there are asset pricing bubbles, which arise endogenously because of the presence of constrained agents. The size of bubbles depends, primarily, on the ability of the arbitrageur to exploit the arbitrages available due to the mispriced assets, and hence, on the credit conditions. The bubble on the stock vanishes in the limit of infinite credit. Even though all agents have logarithmic utility, the stock price and volatility display the "leverage effect". The impact of the form of the wealth constraint on the results is also assessed.

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