Revisions of consensus forecasts of macroeconomic variables positively predict announcement day forecast errors, whereas stock market returns on forecast revision days negatively predict announcement day returns. A dynamic noisy rational expectations model with periodic macroeconomic...

In a model where investors disagree about the fundamentals of two stocks, the state price density depends on investor disagreements for both stocks, especially the larger stock. This implies that disagreement among investors in a large firm has a spillover effect on the pricing of other stocks...

Using survey forecasts, we find that systematic errors in expectations of long-term inflation and short-term nominal earnings growth are the main driver of prices and return puzzles for bonds and stocks. We demonstrate this by deriving and testing a single necessary and sufficient condition...

We study a class of endowment economies with long-run risks in which agents have generalized recursive smooth ambiguity preferences and heterogeneous beliefs. The expected growth rate of aggregate consumption consists of a persistent component. Agents cannot observe the component but learn about...

This paper studies the equilibrium price of an asset that is traded in continuous time between N agents who have heterogeneous beliefs about the state process underlying the asset's payoff. We propose a tractable model where agents maximize expected returns under quadratic costs on inventories...

It is generally believed that excessive stock market volatility reflects non-mathematical market expectations that are driven by “irrational exuberance” or “animal spirits”. As shown in this paper, there is an alternative explanation. If ex-ante and ex-post expectations are calculated in...

We estimate an ex ante probability of extreme negative returns (crashes) of individual stocks as a measure of potential overpricing and find that stocks with a high probability of crashes earn abnormally low returns. Stocks with high crash probability are overpriced regardless of the level of...

We document a nominal stock price effect that is (like momentum) associated with (national) culture. Using the full spectrum of cultural dimensions proposed by Hofstede et al. and the cross-section of stock returns of 41 countries, we not only show a robust predictive and explanatory power of...

I set up a model in which two types of ambiguity-averse traders disagree on how to interpret a public signal. When traders first observe contradicting interpretations of the signal, they don't know whether to attribute the clash of opinions to different information processing or to information...

Purpose - We propose a risk factor for idiosyncratic entropy and explore the relationship between this factor and expected stock returns. Design/methodology/approach - We estimate a cross-sectional model of expected entropy that uses several common risk factors to predict idiosyncratic entropy....