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This paper studies equilibrium asset pricing with liquidity risk — the risk arising from unpredictable changes in liquidity over time. It is shown that a security's required return depends on its expected illiquidity and on the covariances of its own return and illiquidity with market return and market illiquidity. This gives rise to a liquidity-adjusted(More)
This is the first study that uses Merton's (1974) option pricing model to compute default measures for individual firms and assess the effect of default risk on equity returns. The size effect is a default effect, and this is also largely true for the book-to-market (BM) effect. Both exist only in segments of the market with high default risk. Default risk(More)
and seminar participants at Chicago GSB, Harvard Business School, and the NBER Asset Pricing meeting for helpful comments. We are grateful to Ken French for providing us with some of the data used in this study. All errors and omissions remain our responsibility. Campbell acknowledges the financial support of the National Science Foundation. Abstract This(More)
We provide evidence that stocks with higher dispersion in analysts' earnings forecasts earn lower future returns than otherwise similar stocks. This effect is most pronounced in small stocks and stocks that have performed poorly over the past year. Interpreting dispersion in analysts' forecasts as a proxy for differences in opinion about a stock, we show(More)
Aggregate stock prices, relative to virtually any indicator of fundamental value, soared to unprecedented levels in the 1990s. Even today, after the market declines since 2000, they remain well above historical norms. Why? We consider one particular explanation: a fall in macroeconomic risk, or the volatility of the aggregate economy. Empirically, we find a(More)
We parsimoniously characterize the severity of market frictions affecting a stock using the average delay with which its share price responds to information. The most severely delayed firms command a large return premium that captures the size effect and part of the value premium. Moreover, idiosyncratic risk is priced only among the most delayed firms.(More)
We develop a theory in which the decision to pay dividends is driven by investor demand. Managers cater to investors by paying dividends when investors put a stock price premium on payers and not paying when investors prefer nonpayers. To test this prediction, we construct four time series measures of the investor demand for dividend payers. By each(More)
This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints , stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. Using a data set of firms' principal customers to(More)
July2000 Stambaugh acknowledges support provided by his appointment during the 1997-98 academic year as a Marvin Bower Fellow at Harvard Business School, where portions of this research were conducted. Pastor is grateful for research support from the are appreciated. The views expressed herein are those of the authors and not necessarily those of the(More)
A recursive test procedure is suggested that provides a mechanism for testing explosive behavior, date stamping the origination and collapse of economic exuberance, and providing valid confidence intervals for explosive growth rates. The method involves the recursive implementation of a right-side unit root test and a sup test, both of which are easy to use(More)