We propose a new approach for estimating expected returns on individual stocks from a large number of firm characteristics. We treat expected returns as latent variables and apply the partial least squares (PLS) estimator that filters them out from the characteristics under an assumption that...

This paper studies how acquisition of non-fundamental information (learning about noise) affects financial markets. We develop a rational expectations model with investors who are endowed with fundamental and non-fundamental information of heterogeneous quality and who optimally allocate...

We theoretically analyze how index investing affects financial markets using a dynamic exchange economy with heterogeneous investors and two Lucas trees. We identify two effects of indexing: lockstep trading of stocks increases market volatility and stock return correlations but reduction in...

This thesis consists of three chapters exploring predictability of stock returns. In the first chapter, I suggest a new approach to analysis of stock return predictability. Instead of relying on predictive regressions, I employ a state space framework. Acknowledging that expected returns and...

We provide a novel theoretical analysis of how index investing affects capital market equilibrium. We consider a dynamic exchange economy with heterogeneous investors and two Lucas trees and find that indexing can either increase or decrease the correlation between stock returns and in general...

We consider five characteristics-based asset pricing models and study whether the non-market components of their stochastic discount factors (SDFs) are associated with macroeconomic shocks. Our analysis involves a comprehensive set of 127 macroeconomic variables and uses machine learning...

The paper provides a novel theoretical analysis of how endogenous time-varying margin requirements affect capital market equilibrium. It finds that margin requirements, when there are no other market frictions, reduce the volatility and the correlation of returns as well as the risk-free rate,...