Mimicking portfolios have long been useful in asset pricing research. In most empirical applications, the portfolio weights are assumed to be fixed over time, while in theory they may be functions of the economic state. This paper derives and characterizes mimicking portfolios in the presence of...

We extend Kyle's (1985) model of insider trading to the case where liquidity provided by noise traders follows a general stochastic process. Even though the level of noise trading volatility is observable, in equilibrium, measured price impact is stochastic. If noise trading volatility is...

Using a comprehensive sample of trades by Schedule 13D filers, who possess valuable private information when they accumulate stocks of targeted companies, this paper studies whether several liquidity measures reveal the presence of informed trading. The evidence suggests that when Schedule 13D...

We analyze a model of informed trading where an activist shareholder accumulates shares in an anonymous market and then expends costly effort to increase the firm value. We find that equilibrium prices are affected by the position accumulated by the activist, because the level of effort...

Parameter learning strongly amplifies the impact of macro shocks on marginal utility when the representative agent has a preference for early resolution of uncertainty. This occurs as rational belief updating generates subjective long-run consumption risks. We consider general equilibrium models...

According to the dynamic version of the Gordon growth model, the long-run expected return on stocks, stock yield, is the sum of the dividend yield on stocks plus some weighted average of expected future growth rates in dividends. We construct a measure of stock yield based on sell-side analysts'...

We propose a new method of testing asset pricing models that relies on using quantities rather than prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate...

This paper makes indirect inference about the time-variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, and no evidence that predictability has...

The hypothesis that financial markets punish traders who make relatively inaccurate forecasts and eventually eliminate the effect of their beliefs on prices is of fundamental importance to the standard modeling paradigm in asset pricing. We establish necessary and sufficient conditions for...

A firm's termination generates bankruptcy costs. This may create incentives for a firm's owner to bail out a firm in bankruptcy and to curb the firm's risk taking outside bankruptcy. We analyze the role of such implicit guarantees in the context of financial institutions that sponsor money...