We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of...

An economy in which investors know the true model and its parameters and filter the regime probability from aggregate consumption history has been empirically rejected. Hypothesizing that prices partly reflect investorsʼ belief about the regime, we infer beliefs from prices. The model fits well...

A novel methodology in testing the long-run risks model of Bansal and Yaron (2004) is presented based on the observation that, under the null, the potentially latent state variables, "long-run risk" and the conditional variance of its innovation, are known a¢ ne functions of the observable...

The market price-dividend ratio is highly correlated with several macroeconomic variables, particularly inflation and labor market variables, but not with aggregate consumption and GDP. We incorporate this observation in an exchange economy with learning about the economic regime from...

The predictability of the market return and dividend growth is addressed in an equilibrium model with two regimes. A state variable that drives the conditional means of the aggregate consumption and dividend growth rates follows different time-series processes in the two regimes. In linear...

We present evidence that the equity premium and the premium of value stocks over growth stocks are explained in the 1982 1996 period with a stochastic discount factor (SDF) calculated as the weighted average of individual households' marginal rate of substitution with low and economically...

American options on the S&P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while violations...

We explore the consequences for asset pricing of admitting a bequest motive into an otherwise standard overlapping generations model where agents trade equity and perpetual debt securities. Prices of securities are seen to be approximately 50% higher in an economy with bequests as compared to an...

Widespread violations of stochastic dominance by one-month Samp;P 500 index call options over 1986-2006 imply that a trader can improve expected utility by engaging in a zero-net-cost trade net of transaction costs and bid-ask spread. Although pre-crash option prices conform to the...

The tax law confers upon the investor a timing option--to realize capital losses and defer capital gains. With the tax rate on long term capital gains and losses being about half the short term rate, the tax law provides a second timing option--to realize capital losses short term and realize...