Essays in Financial Economics

Abstract: Chapter 1 develops a framework to investigate the impact of the financial crisis starting in 2007 and employs an extended GARCH model to test for spillover and contagion effects originating from the financial sector. We find that the financial crisis affects financially distressed firms more heavily than non-distressed firms. Financial constraints do not play an equally crucial role during the crisis. Overall, the analysis shows that the financial sector affects the returns of non-financial firms during the crisis. We find little evidence that the turbulence in the financial sector expressed in terms of volatility fully encroaches upon non-financial firms. Chapter 2 introduces a model aiming to explain the equity premium puzzle. Consumers exhibit both pessimism and doubt. Consumers are pessimistic if their beliefs about the dividend are a translation of the objective dividend by an independent and identically distributed normal random variable with negative mean. Consumers exhibit doubt if their beliefs are a translation of the objective dividend by an independent and identically distributed normal random variable with mean zero. A cross-sectional empirical study using the SHARE database explores the differences between various European countries in terms of pessimism and doubt and tests the theoretical model empirically.