We build an equilibrium model to explain why stock return predictability concentrates in bad times. The key feature is that investors use different forecasting models, and hence assess uncertainty differently. As economic conditions deteriorate, uncertainty rises and investors' opinions...

Supported by empirical examples, this paper provides a theoretical analysis on the impacts of using a suboptimal information set for the estimation of the empirical pricing kernel and, more in general, for the validity of the fundamental theorems of asset pricing. While inferring the...

We present evidence from an event study that runs counter to the notion that the momentum and book-to-market (B/M) effects can be fully explained by time-varying risk premia. We minimize the joint hypothesis problem in market-efficiency tests by examining a relatively short (26-day) window that...

In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as “anomalies” the theory of rational finance cannot explain: (i) Predictability of asset returns; (ii) The Equity Premium; (iii) The Volatility Puzzle. We offer resolutions of...

We examine whether the results supporting the sentiment-related overpricing story by Stambaugh, Yu, and Yuan (J. Financial Economics, v.104, p.288-302) is still valid after controlling for macroeconomic conditions. We no longer find the results consistent with the sentiment-related overpricing...

This paper offers theoretical, empirical, and simulated evidence that momentum regularities in asset prices are not anomalies. Within a general, frictionless, rational expectations, risk-based asset pricing framework, riskier assets tend to be in the loser portfolios after (large) increases in...

We provide strong evidence that the dispersion of individual stock options trading volume across moneynesses (IDISP) contains valuable information about future stock returns. Stocks with high IDISP consistently underperform those with low IDISP by more than 1% per month. In line with the idea...

This paper is the second in a series of critiques of the assumption that stable economic relations exist between certain "firm characteristics" and expected returns. The paper explains why this is not the case for past returns and provides theoretical, empirical, and simulated evidence that the...

I set up a model in which two types of ambiguity-averse traders disagree on how to interpret a public signal. When traders first observe contradicting interpretations of the signal, they don't know whether to attribute the clash of opinions to different information processing or to information...

We study how market sentiment is dynamically related to a range of risk premia in the short-run, using three measures of sentiment (the implied volatility index, investment advisor sentiment, and individual investor sentiment) and four factor premia (market, size, value, and momentum) for the...