Speculative asset prices

Abstract: In this thesis, I tackle several key questions in financial economics. First, I focus on the question \u201cwhy do stock prices move over time\u201d? In theory, stock prices should equal the expected discounted cash-flows. However, does the variation in stock prices come from changes in expected cash-flows or discount rates? Why is this important? From the standpoint of finance practitioners, understanding the risk-return relationship can improve tactical asset allocation decisions and is crucial to assess the potential of new projects. For academics, evidence in return and dividend growth predictability disputes classic asset-pricing theories. Second, I address the question if managers adjust important decisions, such as dividend policy or the timing of initial public offerings, when the threat of war increases. For long-run investors, dividends form the largest part of the income. Having an understanding of managerial behavior, in particular when the disaster probability increases, is important for asset allocation decisions. Moreover, I test whether changes in stock prices in time of increased military conflict are driven by changes in expected cash-flows or changes in discount rates. In general, I show that time-varying expected returns and expected dividend growth are essential to understand stock price changes