Market sentiment drives fluctuations in financial markets, but it is measured with empirical proxies lacking strong theoretical foundations. In a generalization of the Consumption CAPM where the representative agent has a prospect theory probability weighting function, we derive a formula for...

We study a representative agent that separates beliefs, ambiguity, and ambiguity attitude and nests benchmark models of expected utility preferences and ambiguity aversion. Within that framework, matching four market moments (the risk-free rate, equity premium, variance risk premium, and...

Momentum is a pervasive characteristic of financial markets that lacks a broadly accepted explanation. In addition to its longstanding challenge to asset pricing theory, recent work finds that momentum poses a challenge for expected utility (EU) theory, opening an avenue for new decision...

We investigate consumers’ preference for scarcity in a real market with large stakes. We find evidence that the elasticity of demand for scarcity is constant across prices ranging from $50 to nearly $4 million, that preference for scarcity follows a power law, and that it explains 95% of the...

We decompose the excess market return into speculation and non-speculation components. The former is negative and predicted by market sentiment. The latter is positive and not predicted by sentiment. The speculation component explains roughly 30% of the variation in the excess market return. In...