Are excess returns predictable and if so, what does this mean for investors? Previous literature has tended toward two polar viewpoints: that predictability is useful only if the statistical evidence for it is incontrovertible, or that predictability should affect portfolio choice, even if the...

Financial economists have long been interested in the empirical relation between the conditional mean and conditional volatility of excess stock market returns, often referred to as the risk-return relation. Unfortunately, the body of empirical evidence on the risk-return relation is mixed and...

We quantify the effect of financial leverage on stock return volatility in a dynamic general equilibrium economy with debt and equity claims. We study the effects of financial leverage on the market portfolio, and on a small firm with idiosyncratic and market risk. In an economy with both a...

Value stocks have higher average returns than growth stocks. At the same time, the duration of value stocks' cash flows is considerably shorter than that of growth stocks. We show that when investors can fully distinguish short- and long-run consumption risk components of dividend growth...

Evidence of stock return predictability by financial ratios is still controversial, as documented by inconsistent results for in-sample and out-of-sample regressions and by substantial parameter instability. This paper shows that these seemingly incompatible results can be reconciled if the...

This paper suggests a solution to the puzzling finding documented in Moskowitz and Vissing-Jorgensen (2002) that the return to an index of private equity is equal to the return to the CRSP index of public equity even though investment in private firms is substantially riskier. It presents an...

The main contribution of this work is to provide a dynamic general equilibrium model of asset allocation, allowing to reconcile economic theory with several puzzling contradictions recently pointed out in the literature: (i) the asset allocation puzzle, (ii) the observed time-variation in...

This paper investigates how the degree of trading frictions in asset markets affects portfolio allocations, asset prices, efficiency, and several measures of liquidity, such as execution delays, bid-ask spreads, and trade volumes. To this end, we generalize the search-theoretic model of...