A Markov-switching model of postwar quarterly real GNP growth is used to examine the duration dependence of business cycles. It extends the Hamilton model and the duration-dependent model of Durland and McCurdy, and compares quite favorably to simpler models in out-of-sample forecasting. When an...

We study a Lucas asset-pricing model that is standard in all respects, except that the representative agent's subjective beliefs about endowment growth are distorted. Using constant relative risk-aversion (CRRA) utility, with a CRRA coefficient below 10; fluctuating beliefs that exhibit, on...

This paper demonstrates that negative serial correlation in long-horizon stock returns is consistent with an equilibrium model of asset pricing. When investors display only a moderate desire to smooth their consumption, commonly used measures of mean reversion in stock prices calculated from...

Recent empirical studies have found that stock returns contain substantial negative serial correlation at long horizons. We examine this finding with a series of Monte Carlo simulations in order to demonstrate that it is consistent with an equilibrium model of asset pricing. When investors...