Costas Xiouros

Journal of Financial Economics 153 Doi: https://doi.org/10.1016/j.jfineco.2023.103774

We present an analytical solution for a pure exchange economy featuring a continuum of agents with disagreement, time-varying information quality, and reference-dependent preferences. Our general equilibrium model exhibits stationary dynamics. By examining the implications of the model, we find that the commonly studied asset pricing channels of disagreement have limited quantitative significance. On the other hand, variations in information quality, which affect disagreement levels, lead to substantial excess stock price volatility. This finding contributes significantly to explaining the equity premium and sheds light on empirical relationships between forecast dispersion and asset prices, the upward sloping real yield curve, and long-term yield movements.

Social Science Research Network (SSRN) Doi: https://doi.org/10.2139/ssrn.4558796

Social Science Research Network (SSRN) Doi: https://doi.org/10.2139/ssrn.3489502

Management science Doi: https://doi.org/10.1287/mnsc.2019.3561

Management science 67(4) Doi: https://doi.org/10.1287/mnsc.2019.3561

Technology choice allows for substitution of production across states of nature and depends on state-dependent risk aversion. In equilibrium, endogenous technology choice can counter a persistent negative productivity shock with an increase in investment. An increase in risk aversion intensifies transformation across states, which directly leads to higher investment volatility. In our model and the data, the conditional volatility of investment correlates negatively with the price-dividend ratio and predicts excess stock market returns. In addition, the same mechanism generates predictability of consumption growth and produces fluctuations in the risk-free rate