Taking account of both asymmetric information and rational learning, we show that heterogeneous belief in a rational expectation model can explain many empirical findings of seemingly emotional behavior in stock market, such as bubbles, momentum, contrarian, and technical trading. We show that...

We decompose aggregate market variance into an average correlation component and an average variance component. Only the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility. Portfolios with high (low) idiosyncratic volatility relative to...

We decompose aggregate market variance into an average correlation component and an average variance component. Only the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility. Portfolios with high (low) idiosyncratic volatility relative to...