In this paper, we examine an exchange economy with a financial market composed of three assets: a share of a stock, an European call option written on the stock, and a riskless bond. The financial market is assumed to be incomplete and the option is not a redundant asset. In such a case the...

This paper analytically solves a heterogeneous agent model with idiosyncratic shocks to marginal utility of consumption and explores the effects of the borrowing constraint on the price of the asset, the composition of borrowers and lenders in the credit market, and wealth inequality. Results...

We show that cross-border financial flows arise when countries differ in their abilities to use assets as collateral. Financial integration is a way of sharing scarce collateral. The ability of one country to leverage and tranche assets provides attractive financial contracts to investors in the...

Rational bubbles in stocks can cause increases in trading volume, even after accounting for their expansionary effect on output and consumption. Trading volume increases are not caused by speculation driven by differences in beliefs. Dividend-bearing assets used to transfer resources...

We present evidence 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...

Monetary policy shocks have a large impact on stock prices during narrow time windows centered around press releases by the FOMC. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct effect and a network effect. We attribute 50 to 85 percent of...

We analyze optimal monetary policy and its implications for asset prices, when aggregate demand has inertia and responds to asset prices with a lag. If there is a negative output gap, the central bank optimally overshoots aggregate asset prices (asset prices are initially pushed above their...

By using a nonlinear VAR model, we investigate whether the response of the US stock and housing markets to uncertainty shocks depends on financial conditions. Our model allows us to change the response of the US financial markets to volatility shocks in periods of normal and financial distress....

Monetary policy shocks have a large impact on stock prices during narrow time windows centered around press releases by the FOMC. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct effect and a network effect. We attribute 50 to 85 percent of...

Monetary policy shocks have a large impact on aggregate stock market returns in narrow event windows around press releases by the Federal Open Market Committee. We use spatial autoregressions to decompose the overall effect of monetary policy shocks into a direct (demand) effect and an indirect...