Working papers

• Risk price dynamics (with Lars Peter Hansen, Mark Hendricks, and José Scheinkman)
  [PDF, 22 October 2009] Submitted to Journal of Financial Econometrics.
  We present a novel approach to depicting asset pricing dynamics by characterizing shock exposures and prices for alternative investment horizons. We quantify the shock exposures in terms of elasticities that measures the impact of a current shock on future cash-flow growth. The elasticities are designed to accommodate nonlinearities in the stochastic evolution modeled as a Markov process. Stochastic growth in the underlying macroeconomy and stochastic discounting in the representation of asset values are central ingredients in our investigation. We provide elasticity calculations in a series of examples featuring consumption externalities, recursive utility, and jump risk.

Work in progress

• Heterogeneous beliefs under recursive preferences
  [PDF, 9 April 2009]
  We analyze the impact of heterogeneous beliefs in economies where agents have recursive preferences of the Kreps-Porteus type and differ in their subjective beliefs about the distributions of future quantities. We show that the set of Pareto optimal allocations is given as a solution to a planner's problem with Pareto weights evolving according to an Ito process. In a Markov environment, belief heterogeneity can be incorporated without the need for additional state variables. Using a parsimonious economy, we show that agents with distorted beliefs are not driven out of the market for an empirically relevant range of parameters when preferences are nonseparable across time. Return decomposition reveals nonlinearities in contributions of belief heterogeneity across payoff horizons.