This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios)....

The authors develop a multiperiod auction model in which multiple privately informed agents strategically exploit their long-lived information. They show that such traders compete aggressively and cause most of their common private information to be revealed very rapidly. In the limit, as the...

This paper explores the linkages between stock price efficiency, the choice between private and public financing, and the development of capital markets in emerging economies. Generally, the advantage of public financing is high if costly information is diverse and cheap to acquire, and if...

In existing models of information acquisition, all informed investors receive their information at the same time. This article analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others. The model implies that, under...

Feedback from financial market prices to cash flows arises when a firm's nonfinancial stakeholders, for example, its customers, employees, and suppliers, make decisions that are contingent on the information revealed by the price. Complementarities across stakeholders result in cascades, wherein...

We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their...

This article presents a framework for analyzing the dynamic effects of anticipated large demand pressures on asset risk premia. The authors show that large institutions who can time their entry into the market will trade either at the open or during periods of unusual demand pressures. They show...

This paper examines ex ante effects of 'circuit breakers' (mandated trading halts). The author shows that circuit breakers, by causing agents to suboptimally advance trades in time, may have the perverse effect of increasing price variability and exacerbating price movements. He next considers a...

Deviations from no-arbitrage relations should be related to market liquidity, because liquidity facilitates arbitrage. At the same time, a wide futures-cash basis may trigger arbitrage trades and, in turn, affect liquidity. We test these ideas by studying the dynamic relation between stock...