The duo of Fama and French is most famous for their 1992 and 1993 papers documenting strong historical value and size effects. (Fama is also famous – or infamous, depending on your perspective – for his association with the efficient market hypothesis.) The core observation of Fama and French’s seminal papers was that the returns on small-company and value stocks – those with high book-to-marke...

Information, Diversification, and Cost of Capital We study the pricing implications of information in a noisy rational expectations model with a factor structure for multi-asset payoffs. There are two classes of price taking investors in our model; informed investors who receive private signals on asset payoffs, and uninformed investors who draw imperfect inferences about those signals from pri...

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...

We propose a consumption-based capital asset pricing model in which the representative agent’s preferences display state-dependent risk aversion. We obtain a valuation equation in which the vector of excess returns on equity includes both consumption risk as well as the risk associated with variations in preferences. We develop a simple model that can be estimated without specifying the functio...

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 ...

This paper is interested in exploring the capabilities and limitations of investment decision making under uncertainty through lens Quantum Probabilities/formalism stand will be focusing on Capital Asset Pricing Model as use case. Our main purpose to examine historical structural foundations surrounding paradoxes. To ease comprehension issue common reader, we first outline key cornerstones two ...

This paper develops and estimates a heteroskedastic variant of Campbell s [Campbell, J., 1993. Intertemporal asset pricing without consumption data. American Economic Review 83, 487–512] ICAPM, in which risk factors include a stock market return and variables forecasting stock market returns or variance. Our main innovation is the use of a new set of predictive variables, which not only have su...