This paper proposes a dynamic risk-based model that captures the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns. To model the difference between value and growth stocks, we introduce a...

Among the most important pieces of empirical evidence against the standard representative agent, consumption-based asset pricing paradigm are the formidable unconditional Euler equation errors the model produces for cross-sections of asset returns. Here we ask whether calibrated leading asset...

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...

Are excess stock market returns predictable over time and, if so, at what horizons and with which economic indicators? Can stock return predictability be explained by changes in stock market volatility? How does the mean return per unit risk change over time? This chapter reviews what is known...

This paper examines the extent to which individual investors provide liquidity to the stock market, and whether they are compensated for doing so.We show that the ability of aggregate retail order imbalances, contrarian in nature, to predict short-term future returns is significantly enhanced...

This paper deals with the estimation of the risk-return trade-off. We use a MIDAS model for the conditional variance and allow for possible switches in the risk-return relation through a Markov-switching specification. We find strong evidence for regime changes in the risk-return relation. This...

We show that the endogenous stochastic process of the liquidity ofsecurities is as important to investment and valuation as the exogenous stochastic process of their cash flows.We develop a general-equilibrium model with heterogeneous investors who have an every-day motive to trade and pay...

Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a...