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...

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...