We use a simple model to outline the conditions under which corporate investment will be sensitive to non-fundamental movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are “equity...

We build a model that helps explain why increases in liquidity-such as lower bid-ask spreads, a lower price impact of trade, or higher turnoverpredict lower subsequent returns in both firm-level and aggregate data. The model features a class of irrational investors, who underreact to the...

A number of studies have identifed patterns of positive correlation of returns, or comovement, among different traded securities. We distinguish three views of such comovement. The traditional “fundamentals†view explains the comovement of securities through positive correlations in...