This paper decomposes aggregate and individual stock returns into cash flow news, interest rate news, and risk premium news. We then extend the “good beta, bad beta” approach of Campbell and Vuolteenaho (2004) by allowing for a third beta: exposure to interest rate news. Using various stock...

Motivated by extensive evidence that stock-return correlations are stochastic, we analyze whether the risk of correlation changes (affecting diversification benefits) may be priced. We propose a direct and intuitive test by comparing option-implied correlations between stock returns (obtained by...

We propose a new asset pricing model which generalizes the mean-variance framework by including probability weighting, specifically the overweighting of rare, high-impact events. Our model—the Π-CAPM—allows for disentangling volatility and skewness effects and predicts that idiosyncratic...