Asset prices are a valuable source of information about financial market participants.expectations about key macroeconomic variables. However, the presence of time-varying risk premia requires an adjustment of market prices to obtain the market’s rational assessment of future price and policy...

Recent findings on the term structure of equity and bond yields pose serious challenges to existing models of equilibrium asset pricing. This paper presents a new equilibrium model of subjective expectations to explain the joint historical dynamics of equity and bond yields (and their yield...

The key insight from this analysis is that monetary policy should be responding more to negative shocks than positive shocks: optimal monetary policy is asymmetric. Moreover, if we take the stance that asset prices indicate a high cost of exposure to long-run risks, this has very interesting...