We construct a simple reduced-form example of a conditional pricing model with modest intrinsic nonlinearity. The theoretical magnitude of the pricing errors (alphas) induced by the application of standard linear conditioning are derived as a direct consequence of an omitted variables bias. When...

We examine the connection between tail risk — as measured in Kelly and Jiang (2014) — and the cross-section of expected returns. In conditional predictive regression systems and vector-autoregressions of the market portfolio and the long- and shoresides of the Fama-French factor portfolios,...

If a nonlinear risk premium in a conditional asset pricing model is approximated with a linear function, as is commonly done in empirical research, the fitted model is misspecified. We use a generic reduced-form model economy with moderate risk premium nonlinearity to examine the size of the...

We examine the optimal consumption/saving and portfolio allocation responses of rational households subject to an exogenous change in the terms of the Social Security contract. Our analysis uses key features of the actual contract, an exogenous labor income process calibrated to IRS...

A number of recent studies have measured the quantitative effect of excess return predictability on the optimal consumption and portfolio choices of a rational investor, and they have used the utility costs of ignoring predictability as a natural measure of economic significance. We use a...

Constantinides (1990) describes a simple model of intrinsic habit formation that appears to resolve the quot;equity premium puzzlequot; of Mehra and Prescott (1985). This finding is particularly important, since it has motivated a broader consideration of the implications of habit formation...

We examine the optimal portfolio choices of young and old fund managers in a calibrated dynamic life-cyle model of the active manager's investment problem. The optimal policies of any manager depend on age, the wealth to labor income ratio, the value of the manager's private information, and...

A complete markets consumption-based asset pricing model predicts that the behavior of expected real yields on nominally risk free bonds should be closely related to expected consumption growth, adjusted by the variance of consumption growth. In this paper, expected real yields and expected...

We construct a simple reduced-form example of a conditional pricing model with modest intrinsic nonlinearity. The theoretical magnitude of the pricing errors (alphas) induced by the application of standard linear conditioning are derived as a direct consequence of an omitted variables bias. When...