This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: When an asset can be used as collateral (that is, when the asset can be bought on margin), its price goes up. This increase is significant,...

This paper shows that the risk-bearing capacity of securities brokers and dealers is a strong determinant of risk premia and the volatility of returns in commodity markets. I measure risk-bearing capacity as the fraction of broker-dealer financial assets relative to the total financial assets of...

Using data on U.S. Treasury dealer positions from 1990 to 2006, we find evidence of a significant role for dealers in the intertemporal intermediation of new Treasury security supply. Dealers regularly take into inventory a large share of Treasury issuance so that dealer positions increase...

We present estimates of the term structure of inflation expectations, derived from an affine model of real and nominal yield curves. The model features stochastic covariation of inflation with the real pricing kernel, enabling us to extract a time-varying inflation risk premium. We fit the model...

This paper uses Hansen and Jagannathan's (1991) volatility bounds to evaluate models with idiosyncratic consumption risk. I show that idiosyncratic risk does not change the volatility bounds at all when consumers have CRRA preferences and the distribution of the idiosyncratic shock is...

This paper makes use of a natural experiment of the U.S. Treasury Department to examine the relationship between Treasury security issue size and liquidity. Treasury bills that were first issued with fifty-two weeks to maturity and then reopened at twenty-six weeks are shown to be more liquid...

In a 1997 paper, Hansen and Jagannathan develop two pricing error measures for asset pricing models. The first measure is the maximum pricing error on given test assets, and the second measure is the maximum pricing error over all possible contingent claims. We develop a simulation-based...

We present evidence that fluctuations in the aggregate balance sheets of financial intermediaries forecast exchange rate returns - at weekly, monthly, and quarterly frequencies, both in and out of sample, and for a large set of countries. We estimate prices of risk using a cross-sectional,...

This paper models the impact of arbitrageurs on stock prices when arbitrageurs are uncertain about the drift of the dividend process of a risky asset. Under perfect information, the presence of risk-neutral arbitrageurs unambiguously reduces the volatility of asset returns. When arbitrageurs are...

We present tests of excess volatility of exchange rates that impose minimal structure on the data and do not commit to a choice of exchange rate "fundamentals." Our method builds on existing volatility tests of asset prices, combining them with a procedure that extracts unobservable fundamentals...