Essays in empirical asset pricing

This thesis presents three essays on the determinants of risk premia across currency and equity markets. The first essay studies the macroeconomic foundations of currency risk premia using a dataset spanning a century. It decomposes the predictability of 11 fundamentals into cross-sectional (CS) and Dollar components, finding CS predictability is more robust. Using a Bayesian framework to navigate the resulting ”factor zoo,” the analysis reveals a dense currency Stochastic Discount Factor (SDF) where many fundamentals contribute noisy information. An aggregated Bayesian Model Averaged (BMA) SDF demonstrates superior out-of-sample pricing power over parsimonious models. The second essay investigates the time-series predictive power of the Currency Volatility Risk Premium (VRP). It shows that the VRP term-structure significantly forecasts currency appreciation and excess returns, particularly at longer horizons. This premium is linked to macroeconomic distress, suggesting it serves as compensation for bearing risk during adverse economic conditions. The third essay introduces a novel risk factor in the cross-section of U.S. equities: the ”equity recovery rate,” defined as the fraction of market equity recoverable in bankruptcy. A robust, inverse relationship is documented between this rate and subsequent risk-adjusted returns. This premium is shown to be distinct from compensation for leverage, traditional distress risk, and other well-known factors.