We examine the effects of estimation risk and Bayesian learning on equilibrium asset prices when there is uncertainty about both the first and second moments of consumption and dividend growth rates. For the 1891-2007 period, our model generates a sizable average annual equity premium,...

We examine the effects of parameter uncertainty and Bayesian learning on equilibrium asset prices when all the structural parameters of the aggregate consumption and dividend growth rate processes are unknown. With realistic calibration of a parsimonious set of prior parameters, the model...

Historically, cat bonds have provided high single-digit average annual returns, paired with a low volatility and little correlation to other asset classes. While there is an extensive literature that explains (ex-ante) cat bonds spreads, there is no factor model in the academic literature that...

There has been a considerable debate whether disaster models like Barro (2006) can rationalize the equity premium puzzle. This is because empirically disasters are not single extreme events, but tend to be long-lasting periods in which moderate negative consumption growth realizations cluster....

After the Lehman-Brothers collapse, the stock index has exceeded its pre-Lehman-Brothers peak by 36% in real terms. Seemingly, markets have been demanding more stocks instead of bonds. Yet, instead of observing higher bond rates, paradoxically, bond rates have been persistently negative after...

This paper implements a novel model-free methodology to measure skewness risk premia in individual stocks. The methodology takes the form of a trading strategy, a skewness swap. The return on the strategy shows a significant positive skewness risk premium in individual stocks. The risk premium...

We merge the literature on downside return risk and liquidity risk and introduce the concept of extreme downside liquidity (EDL) risks. The cross-section of stock returns reflects a premium if a stock's return (liquidity) is lowest at the same time when the market liquidity (return) is lowest....

We embed a news shock, a noisy indicator of the future state, in a two-state Markovswitching growth model. Our framework, combined with parameter learning, features rich history-dependent uncertainty dynamics. We show that bad news that arrives during a prolonged economic boom can trigger a...

This paper proposes a pure-exchange economy with three key ingredients: habit formation, stochastic moments of aggregate consumption, and a small degree of heterogeneity in risk aversion consistent with empirical data. We obtain closed formulas for many equilibrium quantities, including the...