The puzzle that the market-wide price-dividend ratio predicts neither the market return nor dividend growth in linear regressions is addressed in an equilibrium model with two regimes where the process of the conditional mean of dividend growth is more predictable in one regime than in the...

The mean, covariability, and predictability of the return of different classes of financial assets challenge the rational economic model for an explanation. The unconditional mean aggregate equity premium is almost seven percent per year and remains high after adjusting downwards the sample mean...

By applying stochastic dominance arguments, upper bounds on the reservation write price of calls and puts and lower bounds on the reservation purchase price of these derivatives are derived in the presence of proportional transaction costs incurred in trading the underlying security. The primary...

The Euler equations of consumption are tested on the household consumption of non-durables and services, reconstructed from the CEX database. The estimated relative risk aversion coefficient of the representative household decreases, and the estimated unexplained mean equity premium decreases,...

The observed discrepancies of derivative prices from their theoretical, arbitrage-free values are examined in the presence of proportional transaction costs. Analytic upper and lower bounds on the reservation write and purchase prices, respectively, are obtained when an investor's preferences...

Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key...

American options on the Samp;P 500 index futures that violate the stochastic dominance bounds of Constantinides and Perrakis (2007) from 1983 to 2006 are identified as potentially profitable trades. Call bid prices more frequently violate their upper bound than put bid prices do, while...

We document widespread violations of stochastic dominance by one-month Samp;P 500 index call options market over 1986-2006. These violations imply that a trader can improve her expected utility by engaging in a zero-net-cost trade. We allow the market to be incomplete and also imperfect by...

Empirical difficulties encountered by representative-consumer models are resolved in an economy with heterogeneity in the form of uninsurable, persistent, and heteroscedastic labor income shocks. Given the joint process of arbitrage-free asset prices, dividends, and aggregate income, satisfying...

Proportional transaction costs are considered as a possible explanation of the volatility smile of index options. A tight upper bound on the call option price is derived in the presence of proportional transaction costs by extending stochastic dominance arguments. A tight and novel lower bound...