Empirically, the covariance between stock returns varies with their volatility. We seek a robust theoretical explanation of this. With minimal assumptions, we model stochastic properties of equilibrium returns which result from the interaction between inter-temporal traders and noisy,...

The paper compares the optimal financial contracts of a firm which has private information over its expost revenues when the finance can be provided by either a single or two groups of investors. When they are the only investors we use a financial contract with non-contractible monitoring, in...