economic stabilization is one of the main government objectives in the economy. one of the most destructive and devastating factors that could damage financial markets, are price bubble formations. thus, bubble creation in stock markets can be considered as a result of investor behaviors, because the market prices mainly reflect investor expectations from firm’s future perspectives. the aim of ...

We model consumption and dividend growth as di¤erent processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better a...

We study a production economy with regime switching in the conditional mean and volatility of productivity growth. The representative agent has generalized disappointment aversion (GDA) preferences. We show that volatility risk in productivity growth carries a positive and sizable risk premium in levered equity. Our model can endogenously generate long-run risks in the volatility of consumption...

Many stockholders irrationally believe that high recent market returns predict high future market returns. I argue that the presence of these extrapolative investors can help resolve the equity premium puzzle if the elasticity of intertemporal substitution (EIS) is greater than unity. Extrapolators’ overreaction to dividend news generates countercyclical expected returns. Rational investors res...

An integrated monetary growth model of Keynes–Metzler–Goodwin type with a portfolio approach to its three asset markets (money, bonds, equities) is introduced to study the interaction between the real and the financial part of market economies. Beneath expectations and governmental behavior, profits and their implied dividend payments influence the behavior of asset markets, which determine int...

This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relativel...

A standard assumption of structural models of default is that firms assets evolve exogenously. In this paper, we document the importance of accounting for investment options in models of credit risk. In the presence of financing and investment frictions, firm-level variables which proxy for asset composition carry explanatory power for credit spreads beyond leverage. As a result, cross-sectiona...

In this paper, we study the potential of stocks as a hedge against inflation for different investment horizons. We show that stocks can be a hedge against inflation even if stock returns are negatively correlated with unexpected inflation shocks, and only moderately positively related to expected inflation. Depending on the investment horizon, the optimal hedge ratio can be either positive or n...

Evidence suggests that banks, like firms, face financial frictions when raising funds. The authors develop a quantitative, monetary business cycle model in which agency problems affect both the relationship between banks and firms and the relationship between banks and their depositors. As a result, bank capital and entrepreneurial net worth jointly determine aggregate investment, and are impor...

This paper studies financial policy, investment decisions and the threat of dismissal when managers value control and investments generate manager-specific value. A high probability of investigation focuses the manager on the profitability of replacement and therefore managerspecific value. The probability of an investigation increases when the firm enters bankruptcy. Thus, high debt levels foc...