We develop a simple behavioral macro model to study interactions between the real economy and the stock market. The real economy is represented by a Keynesian goods market approach while the setup for the stock market includes heterogeneous speculators. Using a mixture of analytical and...

During recessions, many macroeconomic variables display higher levels of volatility. We show how introducing an AR(1)-ARCH(1) driving process into the canonical Lucas consumption CAPM framework can account for the empirically observed greater volatility of asset returns during recessions. In...

The 2007-2008 financial crisis highlighted that a turmoil in the financial sector including bursting asset price bubbles can cause pronounced and persistent fluctuations in real economic activity. This justifies the consideration of evolving and bursting asset price bubbles as another source of...

We show that a model with imperfectly forecastable changes in future productivity and an occasionally binding collateral constraint can match a set of stylized facts about "sudden stop" events. "Good" news about future productivity raises leverage during times of expansion, increasing the...

Using US data from June 1984 to July 1999, we show that the impact of firm-specificcharacteristics like size and book-to-price on future excess stock returns varies considerably overtime. The impact can be either positive or negative at different times. This time variation ispartially...