In the presence of transactions costs, no matter how small, ar-bitrage activity does not necessarily render equal all riskless rates ofreturn. When two such rates follow stochastic processes, it is not opti-mal immediately to arbitrage out any discrepancy that arises betweenthem. The reason is...

Our objective is to identify the trading strategy that would allow an investor to take advantage of “excessive” stock price volatility and “sentiment” fluctuations. We construct a general-equilibrium model of sentiment. In it, there are two classes of agents and stock prices are excessively...

We develop a method that allows one to compute incomplete-market equilibria routinely forMarkovian equilibria (when they exist). The main difficulty to be overcome arises from the setof state variables. There are, of course, exogenous state variables driving the economy but, in anincomplete...