sentiment shock that drives the movements of bubbles and is transmitted to the real economy through endogenous credit … constraints. This shock explains most of the stock market fluctuations and sizable fractions of the variations in real quantities …

variables and extract the time-series of four latent fundamental shocks of the model: neutral technology shock, investment …-specific technological shock, monetary policy shock, and risk shock. Asset pricing tests show that our model-implied four-factor model can …-term reversal. The investment-specific technological shock and risk shock play the most important role in explaining those return …