We show that investors’ learning can drastically alter the dynamics of the variance risk premium: it no longer increases as economic conditions deteriorate but exhibits a highly nonlinear pattern, occasionally even turning negative. We demonstrate the intuition using a simple two-state...

When Bayesian risk-averse investors are uncertain about their assets' cash flows' exposure to systematic risk, stock prices react more to news in downturns than in upturns, implying higher volatility in downturns and negatively skewed returns. The reason is that, in good times, less desirable...

We estimate the relative signal jump variance (RSJV) as the difference between the realized positive half-variance and negative half-variance divided by the realized variance using high-frequency intraday data and investigate its role in the cross-sectional pricing in the Chinese stock market....

We study the equilibrium implications on asset prices of institutions' trading with sentiment-driven retail investors. In the model, both the benchmarking concerns of institutions and the (irrational) optimism of retail investors boost the aggregate demand for a stock. We show that the ensuing...

We propose a model of volatility tail behavior, in which the pricing measure dominates the physical measure in both tails of the volatility distribution and, hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors...

We contrast two different asset pricing models, where the pricing kernel either (i) increases in the volatility dimension, reflecting investors' aversion to volatility, or (ii) could be non-monotonic in volatility, reflecting heterogeneity in investors' beliefs. The two models yield opposite...

Empirical evidence indicates that trades by institutional investors have sizable effects on asset prices, generating phenomena such as index effects, asset-class effects and others. It is difficult to explain such phenomena within standard representative-agent asset pricing models. In this...

Several studies have attributed the high excess returns of the momentum strategy in the equity market to investor behavioral biases. However, whether momentum effects occur because of investor underreaction or because of investor overreaction remains a question. Using a simple model to...

This paper aims at providing new insights on the pricing of aggregate volatility risk by incorporating investor sentiment in the relation between sensitivity to innovations in implied market volatility and expected stock returns. Using both cross-sectional and time series analysis, we...