This paper establishes dividend volatility as a fundamental risk metric that prices assets. We theoretically incorporate dividend volatility clustering into a model in which narrow-framing investors are loss averse over fluctuations in the value of their investments. Our model shows that...

We analyze a rational expectations equilibrium model to explore the implications of information networks for the financial market. When information is exogenous, social communication improves market efficiency. However, social communication crowds out information production due to traders'...

This paper studies the wealth and pricing implications of loss aversion in the presence of arbitrageurs with Epstein-Zin preferences. Loss aversion affects an investor's survival prospects mainly through its effect on the investor's portfolio holdings. Loss-averse investors will be driven out of...

We analyze a model where traders have different trading opportunities and learn information from prices. The difference in trading opportunities implies that different traders may have different trading motives when trading in the same market -- some trade for speculation and others for hedging...

We show that a linear pure strategy equilibrium may not exist in Madrigal's (1996, Journal of Finance) setup, contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second-order condition. If the non-fundamental...

Market prices are noisy signals of economic fundamentals. In a two-period model, we show that if the central bank uses market prices as guidance for intervention, large strategic investors (who benefit from high prices) may temporarily depress market prices to induce a market-supportive...

We develop a model to study the observability of investors' information acquisition in financial markets. Relative to observable information acquisition, unobservable information acquisition leads to more information production if and only if the ratio of the information-acquisition cost to...

We propose a model in which investors cannot costlessly process information from asset prices. At the trading stage, investors are boundedly rational and their interpretation of prices injects noise into the price, generating a source of endogenous noise trading. Our setup features price...

We model the strategic interaction between fundamental investors and "back-runners,'' whose only information is about the past order flow of fundamental investors. Back-runners partly infer fundamental investors' information from their order flow and exploit it in subsequent trading. Fundamental...

We study how commodity financialization affects information transmission in a commodity futures market. The trading of financial traders injects both information and noise into the futures price. In consequence, price informativeness in the futures market first increases and then decreases with...