This paper describes a pure-exchange, continuous-time economy with two heterogeneous agents and complete markets. A novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to Frank Knight. The equilibrium is described completely in closed-form. After identifying agents as countries, the model is applied to address the consumption hom...

The increase in equity prices over the 1990s has to a large degree been attributed to permanently higher productivity growth that is derived from the ‘new economy’ and related research and development (R&D) expenditures. This paper establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions, productivity advances can only h...

We find that the positive relation between aggregate accruals and one-year-ahead market returns documented in Hirshleifer, Hou and Teoh [2009] is driven by discretionary accruals but not normal accruals. The return forecasting power of aggregate discretionary accruals is robust to choices of sample periods, return measurements, estimation methods, business condition and risk premium proxies, an...

Introducing extrapolation bias into a standard one-sector production-based real business cycle model with recursive preferences reconciles salient stylized facts about business cycles (low consumption volatility and high investment volatility relative to output) and financial markets (high equity premium, volatile stock returns, and a low and smooth riskfree rate) with low relative risk aversio...

This paper investigates the consequences of imperfect and uneven factor market development for farm efficiency in rural China during transition. In particular, we estimate the extent to which an inverse relationship in farm productivity can be attributed to the administrative (instead of market) allocation of land, and the extent of unevenly developed non-agricultural opportunities. Using a rec...

Insider trading in the credit derivatives market has become a significant concern for regulators and participants. This paper attempts to quantify the problem. Using news reflected in the stock market as a benchmark for public information, we find significant incremental information revelation in the credit default swap market under circumstances consistent with the use of non-public informatio...

In 1990s emerging stock markets evolved from small and shallow into sizeable and liquid markets integrated with the world financial system. This paper empirically studies the conjecture that the relationship between market development and efficiency can be possibly captured by the weak-form market efficiency tests applied to moving subsample windows. The variance-ratio-based multiple comparison...

Article history: Received 6 April 2007 Received in revised form 19 September 2008 Accepted 19 September 2008 Available online 11 October 2008 We examine investment banks' networking function in capital markets, using a sample of Private Investments in Public Equity (PIPEs). We argue that investment banks develop relationships with investors through repeat dealings, and that investment banks' ne...

We evaluate the response of perceived tail risks in financial markets to the implementation of unconventional monetary policy by the U.S. Federal Reserve. Using information from out-of-money equity index options, we find that perceived risks decline significantly in response to both policy announcements and actual asset purchases. The announcement effects are strongest specifically for downside...

Financial Globalization and Monetary Policy* The process of financial globalization has significantly altered the environment in which national monetary policy authorities operate. What implications does this have for the design of monetary policy? The question can be properly addressed only in the context of a model where monetary policy interacts with financial market efficiency. This paper i...