We study the dynamic equilibrium behavior of security prices in an economy where nonfundamental risk arises from agents' heterogeneous beliefs about extraneous processes. We provide a complete characteriszation of equilibrium in terms of the primitives of the economy, via construction of a...

There is a substantial empirical literature, beginning with Fama [1975], that utilizes regressions of the inflation rate in a given period on initial interest rates (or inflation differentials on the slope of the initial yield curve) to test the Fisher hypothesis and/or to provide forecasts of...