Market sentiment drives fluctuations in financial markets, but it is measured with empirical proxies lacking strong theoretical foundations. In a generalization of the Consumption CAPM where the representative agent has a prospect theory probability weighting function, we derive a formula for...

Momentum is a pervasive characteristic of financial markets that lacks a broadly accepted explanation. In addition to its longstanding challenge to asset pricing theory, recent work finds that momentum poses a challenge for expected utility (EU) theory, opening an avenue for new decision...

We decompose the excess market return into speculation and non-speculation components. The former is negative and predicted by market sentiment. The latter is positive and not predicted by sentiment. The speculation component explains roughly 30% of the variation in the excess market return. In...

We study a representative agent that separates beliefs, ambiguity, and ambiguity attitude and nests benchmark models of expected utility preferences and ambiguity aversion. Within that framework, matching four market moments (the risk-free rate, equity premium, variance risk premium, and...

The quantitative implications of income taxation for innovation and aggregate productivity growth are evaluated in the context of a Schumpeterian model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and from incumbent firms improving own...

Recent studies have documented several trends in the U.S. market structure since the 1980s, such as the rise of large firms' markups and their profit margins. An important but not emphasized trend is the rise of the fixed operating costs of large firms. This trend is so salient that the...