Portfolio optimization focuses on risk and return prediction, yet implementation costs critically matter. Predicting …

feature higher risk free rates, lower risk premiums on fully diversified and concentrated assets, less capital accumulation …, yet higher consumption and welfare. Exposure to undiversified firm risk can explain approximately 40% of the level and 20 …% of the volatility of the equity premium. A targeted subsidy that decreases diversification improves welfare by increasing …

We analyze an environment where the uncertainty in the equity market return and its volatility are both stochastic, and … conditional equity premium and risk-free rate in equilibrium. Our empirical analysis shows that the equity premium appears to be … earned for facing uncertainty, especially high uncertainty that is disconnected from lower volatility, rather than for facing …

price volatility and "sentiment" fluctuations. We construct a general equilibrium model of sentiment. In it, there are two … excessively pessimistic. We find that because irrational traders introduce an additional source of risk, rational investors reduce … "sentiment risk." The answer to the question posed in the title is: "There is little that rational investors can do optimally to …

This paper studies the pricing of volatility risk using the first-order conditions of a long-term equity investor who … volatility. Empirically, we present novel evidence that low-frequency movements in equity volatility, tied to the default spread …

help to explain the enormous counter-cyclical volatility of aggregate risk compensation in financial markets. To answer … these intermittent re-balancers more than double the effect of aggregate shocks on the time variation in risk premia by …

uncertainty. The results dictate the role of uncertainty and volatility in structural models and we show they are consistent with … a simple extension of the long-run risk model …

We study the role of information in asset pricing models with long-run cash flow risk. When investors can distinguish … short- from long-run consumption risks (full information), the model generates a sizable equity risk premium only if the … propose a sparsity-based bounded rationality model of long-run risk that is both parsimonious and fully identified from …