This paper develops the CCAPM model to allow for long-run risk in durable consumption. Allowing Epstein-Zin preferences to incorporate non-separability of durable and non-durable consumption in utility provides for an Euler equation which can be shown to provide a much better explanation of equity market features than either the basic CAPM or CCAPM. .The paper incorporates this discount factor ...

This paper studies consumption and savings dynamics, asset returns, and welfare losses in three macroeconomic models with information processing constraints which is also called “rational inattention” (henceforth, RI) in Sims (2003). The first model is a standard Linear Quadratic Gaussian (henceforth, LQG) permanent income (henceforth, PIH) model. We show that incorporating RI can better explai...

We propose a model in which real interest rates respond to both expected consumption growth and time preferences. Exposures to future consumption growth and time preference interest rate shocks are both priced relative to the Capital Asset Pricing Model (CAPM) and the Consumption Capital Asset Pricing Model (CCAPM). However, the two types of interest rate risk have different prices, and when el...

I investigate empirically the ability of financial market incompleteness to help explaining the equity premium puzzle. I estimate the non-diversifiable component of the cross-sectional volatility of income and examine its cyclical properties. Equipped with these estimates, I compute the implied equilibrium Sharpe-ratio of excess returns and evaluate the ability of idiosyncratic risk to improve ...

We develop a model in which investors must learn the distribution of asset returns over time. The process of learning is made more difficult by the fact that the distributions are not constant through time. We consider risk-neutral investors who have quadratic utility and are selecting between two risky assets. We determine the time at which it is optimal to update the distribution estimate and...

I develop an analytically tractable dynamic asset pricing model to study expected returns of financially distressed firms in the presence of learning and investor activism. Learning critically affects distressed stocks’ valuations and risk exposures as information about solvency is essential for firm survival in distress. Informational externalities from active investors thus can also have firs...

In this paper, we review pricing of the variable annuity living and death guarantees offered to retail investors in many countries. Investors purchase these products to take advantage of market growth and protect savings. We present pricing of these products via an optimal stochastic control framework and review the existing numerical methods. We also discuss pricing under the complete/incomple...

We introduce intermediation frictions into a Lucas (1978) asset pricing model in order to study the effects of low capital in the intermediary sector on asset prices. Our model shows that low intermediary capital can increase risk premia, Sharpe ratios, volatility and comovement among intermediated assets. Reductions in intermediary capital also lead to a flight-to-quality in which intermediari...