This article analyzes the implications of money illusion for investor behavior and asset prices in a securities market economy with inflationary fluctuations. We provide a belief-based formulation of money illusion which accounts for the systematic mistakes in evaluating real and nominal...

The sovereign CDS market has been growing rapidly in recent years, with a gross notional amount of around 2 trillion dollars in 2015. We document a strong momentum effect in this market. Its unique feature is that this momentum strategy returns are positively skewed and higher during recessions....

Stock market trading restrictions affect stock prices and liquidity directly through constraints on investors' transactions and indirectly by altering the information environment. We isolate this indirect effect by analyzing how stock market restrictions affect corporate-bond prices. Exploiting...

Conventional wisdom suggests that investors' independent biases should cancel each other out and have little impact on equilibrium at the aggregate level. In contrast to this intuition, this paper analyzes models with biased investors and finds that biases often have a significant impact on the...

Can investors with incorrect beliefs survive in financial markets and have a significant impact on asset prices? My paper addresses this issue by analyzing a dynamic general equilibrium model where some investors have rational expectations while others have incorrect beliefs concerning the mean...

News about an individual stock normally has only a trivial impact on the aggregate economy. The news of the aggregate stock market, however, may have a significant impact on the prospects of the economy, and so has a large impact on the pricing kernel. This difference between the aggregate stock...

Using holdings data on a representative sample of all Shanghai Stock Exchange investors, we show that increases in ownership breadth (the fraction of market participants who own a stock) predict low returns: highest change quintile stocks underperform lowest quintile stocks by 23% per year....

We use the advent of new credit default swap (CDS) trading conventions in April 2009—the CDS Big Bang—to study how a shock to funding liquidity impacts market liquidity. After the Big Bang, traders are required to pay upfront fees to execute CDS transactions, with the size of the fees...