Lower skill of the active management industry can imply greater fee revenue, value added, and investor performance. Such outcomes arise in a competitive equilibrium in which portfolio choices of active managers partially echo those of noise traders and also contain manager-specific noise. Both...

We construct an asset pricing model with explicit default to develop a risk-based source of the distress anomaly. We show that distress produces sharply countercyclical betas leading to biased estimates of risk premia and alphas. This effect is amplified when earnings growth is mean-reverting,...

We solve for asset prices in a general affine representative-agent economy with isoelastic recursive utility and rare events. Our novel solution method is exact in two special cases: no preference for early resolution of uncertainty and elasticity of intertemporal substitution equal to one. Our...

A growing literature shows that credit indicators forecast aggregate real outcomes. While the literature has proposed various explanations, the economic mechanism behind these results remains an open question. In this paper, we show that a simple, frictionless, model explains empirical findings...

We examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015 the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro-Swiss franc exchange rate. We find...

We quantify the effect of a significant technological innovation, shale oil development, on asset prices. Using stock returns on major news announcement days allows us to link aggregate stock price fluctuations to shale technology innovations. We exploit cross-sectional variation in industry...

Risk-neutral probabilities, observable from option prices, combine objective probabilities and risk adjustments across economic states. We consider a recursive-utility framework to separately identify objective probabilities and risk adjustments using only observed market prices. We find that a...

Credit Booms are not rare; some end in a crisis (bad booms) while others do not (good booms). We document that credit booms start with an increase in productivity growth, which subsequently falls faster during bad booms. We develop a model in which crises happen when credit booms change to an...

During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as well as shifts by active managers toward lower fees and more index-like investing. I develop an...

We propose a new method of testing asset pricing models that relies on using quantities rather than simply prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of...