Working Papers
Cross-predictability of returns: An equilibrium perspective
Abstract. Directed cash flow linkages give rise to cross-predictability of returns between linked assets solely through equilibrium pricing effects in a frictionless, informationally efficient, and complete market. The risk-based mechanism builds on fundamental principles of economically linked assets. In a consumption-based equilibrium asset pricing model which allows for closed-form solutions, expected excess returns are tied to differences in the strengths of cash flow linkages. Our equilibrium mechanism generates cross-predictability under two conditions. First, cash flow linkages must have a direction. Second, there must be cross-sectional heterogeneity in the strengths of these linkages.
CEO-driven asset prices
Abstract. We show that separating between ownership and control in a production-based asset pricing model with time-varying disagreement leads to the violation of the Fisher separation theorem, despite complete financial markets. This introduces an additional term in the optimal investment equation, relative to a neoclassical model. In equilibrium, we see under-investment relative to what the CEO would implement but over-investment relative to what the pessimistic shareholder would implement if there were no feedback between real investment and asset prices. Depending on disagreement, the response of the investment rate to an aggregate shock can be either positive or negative.