Sorting out commodity and macroeconomic risk in expected stock returns

The dissertation consists of three essays in asset pricing. Chapter I is motivated by the recent surge in institutional investment in commodity futures markets. The chapter studies how commodity risk is priced in stock and futures markets and asks whether this risk premium is time-varying with these changes in investment practices. Chapter II and III are at the intersection of macroeconomics and asset pricing. Chapter II is motivated by the introduction of real bonds as well as the poor empirical track record for inflation as a risk factor in stock returns. The chapter estimates the inflation risk premium in the stock market and identifies the proximate causes of its variation over time. Chapter III tests an element that is common to most asset pricing models, but often overlooked in empirical tests: time-series and cross-sectional consistency. The chapter studies whether risk premiums for state variable risks in the cross-section of individual stocks are consistent with how these variables predict macroeconomic activity in the time-series. The dissertation resuscitates a central role for real factors in asset pricing and identifies a novel channel through which stock market risk premiums vary over time: the introduction of an asset that hedges the underlying risk more adequately.