We show theoretically that inflation disagreement drives a wedge between real and nominal yields and raises their levels and volatilities. We demonstrate empirically that an inflation disagreement increase of one standard deviation raises real and nominal yields and their volatilities,...

In a production economy, in which agents have heterogeneous beliefs and a social planner has incomplete knowledge about which beliefs are correct, we introduce the concept of Incomplete Knowledge (IK) efficiency. IK-inefficient allocations can be improved upon without taking a stand on which...

When investors disagree and trade on their views about asset returns, market prices reflect the wealth/consumption share weighted average belief about risk premia, where more accurate, risk tolerant, or patient investors carry a larger weight. We explore the properties of this market view, and...

With overlapping generations and heterogeneous risk aversion there is no unique relation between aggregate risk aversion and the real rate of interest, and this type of endogenous “noise” cannot arise in an economy where agents live forever. Our framework accommodates many agent types and...

I introduce an external habit for each consumption good, known as deep habits, into an otherwise standard international equilibrium model with multiple consumption goods and multiple countries. I show that deep habits coupled with consumption home bias account for a wide range of asset pricing...

Correlations of equity securities have varied substantially over time and remain a source of continuing policy debate. This paper studies stock market correlations in an equilibrium model with heterogeneous risk aversion. In the model, preference heterogeneity causes countercyclical variations...

When experience and a noisy signal shape expectation formation across cohorts in a constrained rational fashion, a binding short-sale constraint interplays with beliefs to drive investors out of the stock market. Given beliefs, nonparticipation can be optimal for extended periods or lead to...

Recessions lead to substantial, yet not immediate drop in output. The low and often negative growth during recessions is typically followed by a steady recovery with abnormally high growth. We propose a theory where a recession is preceded by the introduction of a new risk source. The expected...

We study how disagreement on both factor and stock-specific risk exposures across many agents and securities impact asset prices. Our theoretical analyses predict that disagreement about factor dynamics drives larger flows into portfolios that are more exposed to the factors. Consequently, these...