We study asset pricing implications of return extrapolation in a Lucas economy. We find that the effect of extrapolation is mainly on short rates rather than risk premia, time variation in expected returns is mainly driven by time-varying short rates, and return volatility can be lower than...

We introduce a heterogeneous agent asset pricing model in continuous-time to show that trend chasing, switching and herding all contribute to market volatility in price and return and volatility clustering, but their impact are different. On the one hand, the fluctuations of market price and...