In this paper we study the effects of financial integration on risk-sharing. Conventional macroeconomic theory suggests that the integration of financial markets improves welfare. In contrast to the literature we assume that households have heterogeneous beliefs. Because of the differences in...

A recent literature shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility, that is, it assumes an inverse relationship between first and second moments of asset returns. This paper suggests a reason...

This paper presents a new numerical method for solving stochastic general equilibrium models with dynamic portfolio choice over many financial assets. The method can be applied to models where there are heterogeneous agents, time-varying investment opportunity sets, and incomplete asset markets....

A recent literature shows how an increase in volatility reduces leverage. However, in order to explain pro-cyclical leverage it assumes that bad news increases volatility, that is, it assumes an inverse relationship between first and second moments of asset returns. This paper suggests a reason...

We study a dynamic general equilibrium model with costly-to-short stocks and heterogeneous beliefs. The closed-form solution to the model shows that costly short sales drive a wedge between the valuation of assets that promise identical cash flows but are subject to different trading...

We develop a dual-control method for approximating investment strategies in incomplete environments that emerge from the presence of trading constraints. Convex duality enables the approximate technology to generate lower and upper bounds on the optimal value function. The mechanism rests on...

The size distributions of many economic variables seem to obey the double power law, that is, the power law holds in both the upper and the lower tails. I explain the emergence of the double power law - which has important economic, econometric, and social implications - using a tractable...

We show that an intrinsic property of a large class of rational bubbles is their capacity to relax the agents' debt limits. Any bubble that preserves the set of pricing kernels, or equivalently, the asset span, has effectively an identical effect on consumption and real interest rates as an...

We propose a 2-country asset-pricing model where agents' preferences change endogenously as a function of the popularity of internationally traded goods. We determine the effect of the time-variation of preferences on equity markets, consumption and portfolio choices. When agents are more...