A sentiment-based model of the exchange rate is proposed to understand the forward premium puzzle. Agents over- or underestimate the growth rate of the economy. All else equal, when perceived domestic growth is higher than perceived foreign growth, the domestic interest rate is higher than the...

In this paper we study the implications of general-purpose technological growth for asset prices. The model features two types of shocks: "small", frequent, and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock....

Recent studies have proposed a large set of powerful anomaly-based factors in the stock market.This study examines the role of investor inattention in the corresponding anomalies underlying these factors and other underreaction-related anomalies. Using media coverage as a proxy for investor...

We find that the degree of extrapolative weighting in investors' belief (DOX) proposed by Cassella and Gulen (2018) has strong predictive power for a broad set of overreaction-related anomalies in the stock market. The average return spread of these anomalies is about 0.81% per month following...

We introduce uncertainty into Holmstrom and Milgrom (1987) to study optimal long-term contracting with learning. In a dynamic relationship, the agent's shirking not only reduces current performance, but also increases the agent's information rent due to the persistent belief manipulation effect....

This study explores the role of investor sentiment in the pricing of a broad set of macro-related risk factors. Economic theory suggests that pervasive factors (such as TFP and consumption growth) should be priced in the cross-section of stock returns. However, when we form portfolios based...

Many investors purchase stock but are reluctant or unable to sell short. Combining this arbitrage asymmetry with the arbitrage risk represented by idiosyncratic volatility (IVOL) explains the negative relation between IVOL and average return. The IVOL-return relation is negative among overpriced...

We propose a tractable model of an informationally inefficient market. We show the equivalence between our model and a substantially simpler model whereby investors face distortive investment taxes depending both on their identity and the asset class. We use this equivalence to assess existing...

This paper examines a new set of implications for existing asset pricing models regarding the correlation between returns and consumption growth over both the short run and the long run. The fi ndings suggest that external habit formation models face a challenge in producing two robust facts in...

In this paper we study the implications of general-purpose technological growth for asset prices. The model features two types of shocks: quot;smallquot;, frequent, and disembodied shocks to productivity and quot;largequot; technological innovations, which are embodied into new vintages of the...