Macro?financial volatility under dispersed information

We provide a production?based asset pricing model with dispersed information and small deviations from full rational expectations. In the model, aggregate output equity prices depend on higher?order beliefs about demand individual stochastic discount factors. prove that price volatility becomes arbitrarily large as of idiosyncratic shocks diverges to infinity due interaction signal extraction trading decisions, while falls. propose two?step spectral factorization method permits closed?form solutions in frequency domain applicable wide range models more hidden states than signals. Our can quantitatively match volatilities observed U.S. data.