Essays on Asset Prices

Abstract

This thesis contains three essays spanning the fields of commodity currency prediction and house price sentiment. This first essay examines the long-run relationship between the real price of crude oil and the real exchange rate for Canada. The real Canadian exchange rate is found to be positively correlated with the real price of crude oil beginning in 2002-2003, which implies that in the long run, Canada’s real exchange rate varies with the level of the real oil price. Furthermore, the long-run adjustment of the real exchange rate is found to be via the nominal exchange rate, which implies that real exchange rate movements can forecast movements in the nominal exchange rate. The second essay studies households’ expectations of the house price growth and finds three dimensions of heterogeneity which are consistent with Sims' (2003) rational inattention theory, namely the heterogeneity in households' mean forecasts, in the perceived precision of households' forecasts, and in their dynamic forecasting rules. The third essay investigates whether households' expectations of future home price growths react to the information about past home price growths differently over different horizons. I find that households' expectations display an extrapolating pattern from the past growth over the short term (12-month) and a mean-reverting pattern over the longer term (5-year).