We demonstrate that limited market participation can arise endogenously in the presence of model uncertainty. Our model generates novel predictions on the relation between limited market participation, the equity premium, and the diversification discount. When the dispersion in investors’ model uncertainty is small, full market participation prevails in equilibrium. In this case, the equity pre...

Severe economic downturns like the great depression of the 1930s take place over extended periods of time. I model an economy where rare economic disasters increase the likelihood of subsequent near term disasters. The mechanism generates more clustering of disasters than existing models. Serial correlation in disasters has important implications for asset prices. For example, it generates a la...

Article history: Received 27 June 2012 Received in revised form 26 June 2013 Accepted 2 July 2013 Available online 10 July 2013 We estimate investable comoment equity risk premiums for the US markets. The stock's contribution to the asymmetry and the fat tails of the market portfolio's payoff are priced into a coskewness premium and a cokurtosis premium. We construct zero-investment strategies ...

A new measure of consumption, garbage, is more volatile and more correlated with stocks than the canonical measure, National Income and Product Accounts (NIPA) consumption expenditure. A garbage-based consumption capital asset pricing model matches the U.S. equity premium with relative risk aversion of 17 versus 81 and evades the joint equity premium-risk-free rate puzzle. These results carry t...

A production-based equilibrium model jointly prices bond and stock returns produces time-varying correlation between real treasury that changes in both magnitude sign. The term premium is incorporates risk aversion two physical technologies with different cash-flow risks. Bonds hedge risk-aversion shocks command negative through this channel. Cash-flow produce co-movement of positive premium. R...

The authors propose that the revenue premium a brand generates compared with that of a private label product is a simple, objective, and managerially useful product-market measure of brand equity. The authors provide the conceptual basis for the measure, compute it for brands in several packaged goods categories, and test its validity. The empirical analysis shows that the measure is reliable a...

Empirical tests are performed to examine whether foreign exchange excess returns for the British pound, Canadian dollar, Deutsche mark, and Japanese yen are related to volatility in the currency market and volatility in the stock markets. Our results indicate that volatility (measured by standard deviation and variance) from currency markets is signi® cant in explaining the excess returns, sugg...

This paper advances a simple model that emphasizes the diversity of capital types, some of which are long lived, while others are highly specific. This modeling of capital implies that irreversibility constraints may be strongly binding, thus generating sizable and undiversifiable capital losses, even with moderate shocks and positive aggregate investment. The resulting riskiness of investing i...