A central puzzle for asset pricing theory is that stock prices are much more volatile than corporate dividends. One possible resolution is to modify standard models by introducing stochastic discount factors that induce large variation in prices for relatively smooth sequences of dividends. But...

If stocks go up, investors may want to rebalance. But investors cannot all rebalance. Expected returns mustrise (or other moments must change) so that the average investor is happy to hold the total market portfolio despite its greater allocation to stocks. In this way, of market clearing can...