The continuously compounded (CC) interest rate on a one-month Treasury bill observed at the end of month t-1 is the sum of a CC expected real return and a CC expected inflation rate, Rt-1 = Et-1(rt) + Et-1(It). Two approaches are used to split Rt-1 between its two components. In the first,...

This issue of the Journal of Financial Economics contains the first set of studies in the new Clinical Papers section. The objective of this section is to provide a high-quality professional outlet for scholarly studies of specific cases, events, practices, and specialized applications. By...

Tests of asset-pricing models commonly use either the cross-section regression approach of Fama and MacBeth (1973) or the time-series regression approach that centers on the GRS test of Gibbons, Ross, and Shanken (1989). The goal here is to discuss how the two approaches differ and their...

Suppose the ICAPM governs asset prices and there is a total of S state variables that might be of hedging concern to investors. Can we determine which state variables are, in fact, of hedging concern? What does it mean to say that these state variables are priced, that is, that they give rise to...

The concept of multifactor portfolio efficiency plays a role in Merton's intertemporal CAPM (the ICAPM), like that of mean-variance efficiency in the Sharpe-Lintner CAPM. In the CAPM, the relation between the expected return on a security and its risk is just the condition on security weights...

My paper, “Does the Fed control interest rates?” is in the 2013 Review of Asset Pricing Studies (Volume 3, pp. 180-199). The paper finds that the Fed controls the Federal Funds (FF) rate (the overnight rate on interbank borrowing of reserves). Other short-term rates are related to FF, but...

Suppose the ICAPM governs asset prices, and there are a total of S state variables that might be of hedging concern to investors. Can we determine which state variables are in fact of hedging concern? What does it mean to say that these state variables are priced, that is, that they give rise to...

The lending channel model posits that control of deposits that have reserve requirements allows the Fed to constrain the financing of the illiquid loans to businesses and consumers that are the comparative advantage of banks and their link to real activity. The constraint works because banks do...

I was invited by the editors to contribute a professional autobiography for the Annual Review of Financial Economics. I focus on what I think is my best stuff. Readers interested in the rest can download my vita from the website of the University of Chicago, Booth School of Business. I only...

Government stimulus programs that transfer resources to citizens are meant to spur consumption. I examine the effects of stimulus through the lens of the permanent income (PI) hypothesis. The PI model predicts that a temporary increase in income due to stimulus leads to a small increase in...