Essays in Financial Economics

This thesis studies the interrelation between the financial market and the real economy. Financial market as part of the economy is affected by, as well as affects the real economy. My thesis essentially touches base on the two directions around this loop. To study how the real economy affects financial market, I looked at the stock market’s response to the macroeconomic news announcements, and unfold some interesting phenomena: Chapter 1 shows that investors surprisingly underreact to some important macroeconomic news announcements, the Initial Jobless Claims report. The stock market continues to drift up (down) for several months following the good (bad) employment news. Chapter 2 shows that investors will factor in the concurrent macroeconomic information when they are trading firm-specific earnings announcements. Investors react more strongly to the earnings announcements when the macroeconomic news and the earnings news are concordant (i.e., both positive or both negative). To study how the financial market affects the real economy, I looked at how the stock market’s design influences macroeconomic variables. By collecting a large panel dataset which covers various countries and stock market trading rules, Chapter 3 shows that a well-designed stock market could decrease a country’s funding cost and improve its allocative efficiency. This could potentially provide policy implications for the financial regulations.