We build an equilibrium model to explain why stock return predictability concentrates in bad times. The key feature is that investors use different forecasting models, and hence assess uncertainty differently. As economic conditions deteriorate, uncertainty rises and investors' opinions...

We explore the effects of information propagation in a centralized financialmarket. Specifically, we embed search frictions within the Grossman andStiglitz (1980) framework, relying on information percolation as modeled inDuffie, Malamud, and Manso (2009). First, we show that information...

A flat Securities Market Line is not evidence against the CAPM. In a rational-expectations economy in which markets are not informationally efficient, the CAPM holds but is rejected empirically (Type I Error). There exists an information gap between the empiricist and the average investor who...

We study how transparency, modeled as information about one's counterparty liquidity needs, affects the functioning of an over-the-counter market. In our model, investors hedge endowment risk by trading bilaterally in a search-and-matching environment. We construct a bargaining procedure that...

Regardless of whether the CAPM is rejected for valid reasons or by mistake, a single long-short portfolio will always explain, together with the market, 100% of the cross- sectional variation in returns. Yet, this portfolio, which we coin the “Low-Minus-High (LMH) portfolio,” need not proxy...

A pervasive empirical finding is that mutual fund managers do not maintain their performance. In this paper, I show that social interactions can explain this fact. To do so, I allow a “crowd” of managers to meet at random times and exchange ideas within a rational-expectations equilibrium...

We build an information-based two-country general equilibrium model. There are two dividend processes with correlated growth rates. Agents observe a global public signal informative about both growth rates. We first let agents rationally process information, and then we allow for reasonable...