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 examine the implications of time variation in the correlation between the equity premium and nondurable consumption growth for equity return dynamics in G-7 countries. Using a VAR-GARCH (1,1) model, we find that the correlation increases with recession indicators such as above-average...

This paper examines how risk in trading activity can affect the volatility of asset prices. We look for this relationship in the behavior of interest rate swap spreads and in the volume and interest rates of repurchase contracts. Specifically, we focus on convergence trading, in which...