Abel (2002) shows that pessimism and doubt in the subjective distribution of the growth rate of consumption reduce the risk-free rate puzzle and the equity premium puzzle. We quantify the amount of pessimism and doubt in survey data on US consumption and income. Individual forecasters are, in...

In this paper we present a simple model where asset returns are functions of multiple investment growth rates. The model is tested for its ability to price the 25 Fama-French portfolios using the Generalized Methods of Moments (GMM) methodology, as well as Fama-MacBeth cross-sectional...

This paper studies the pricing of financial assets in a complete general equilibrium set-up. We begin with an asset pricing model à la Lucas grafted on a standard Real Business Cycles model. We provide a new decentralized interpretation of such a model in which firms make meaningful investment...

We examine the bid-ask quotes offered by specialists (or dealers) who face indirect competition from other specialists who trade in related assets. In the context of a simple model where investors have mean variance preferences, we characterize the equilibrium bids and asks quoted by K...

We develop a consumption-based present value relation that is a function of future dividend growth. Using data on aggregate consumption and measures of the dividend payments from aggregate wealth, we show that changing forecasts of dividend growth make an important contribution to fluctuations...

I present a simple model in which it is possible that opening a new market makes everybody worse off. Unlike previous examples in the literature, the analysis does not rely on relative price changes of different consumption goods. This is shown in a standard framework in which uninformed traders...

Survey and option data are used to take a new look at the equity premium puzzle. Survey data on equity returns (Livingston survey) shows much lower expected excess returns than ex post data. At the same time, option data (CBOE's VIX) indicates that investors overestimate the volatility of equity...

In this paper, we consider a dynamic economy in which the agents are privately informed about their skills, which evolve stochastically over time in an arbitrary fashion. We consider an asset pricing equilibrium in which equilibrium quantities are constrained Pareto optimal. Under the assumption...

This paper provides a dynamic rational expectations equilibrium model in which investors have heterogeneous information and investment opportunities. Informed investors privately receive advance information that is useful for predicting future earnings, but is unrelated to current earnings. This...

We study three cases in which specialized arbitrageurs lost significant amounts of capital and, as a result, became liquidity demanders rather than providers. The effects on security markets were large and persistent: Prices dropped relative to fundamentals and the rebound took months. While...