We show how to price the time series and cross-section of the term structure of interest rates using a three-step linear regression approach. Our method allows computationally fast estimation of term structure models with a large number of pricing factors. We present specification tests favoring...

We decompose the time series of equity market risk into short- and long-run volatility components. Both components have negative and highly significant prices of risk in the cross section of equity returns. A three-factor model with the market return and the two volatility components compares...

Does the presence of arbitrageurs decrease equilibrium asset price volatility? I study an economy with arbitrageurs, informed investors, and noise traders. Arbitrageurs face a trade-off between arbitrage and inference: they would like to buy assets in response to temporary price declines (the...

We show that equity markets are typically two-sided and that trades cluster in certain trading intervals for both NYSE and Nasdaq stocks under a broad range of conditions - news and non-news days, different times of the day, and a spectrum of trade sizes. By quot;two-sidedquot; we mean that the...

This paper examines the evolution of risk in the U.S. financial sector using firm-level equity market data from 1975 to 2005. We find that over the past three decades, financial sector volatility has steadily increased, particularly from 1998 to 2002. Increased volatility, driven by common...

We propose a measure for systemic risk: CoVaR, the value at risk (VaR) of the financial system conditional on institutions being in distress. We define an institution's contribution to systemic risk as the difference between CoVaR conditional on the institution being in distress and CoVaR in the...

This paper examines the mechanism by which the incorporation of information into prices leads to cross-autocorrelations in stock returns. We present a simple model where trading on private information occurs first in the large stocks and is transmitted to small stocks with a lag. Such trading...

The recent turmoil in global financial markets underscores the importance of the federal funds market as a means of distributing liquidity throughout the financial system and a tool for implementing monetary policy. In this paper, we explore the network topology of the federal funds market. We...

This paper explores the ability of theoretically based asset pricing models such as the CAPM and the consumption CAPM-referred to jointly as the (C)CAPM - to explain the cross-section of average stock returns. Unlike many previous empirical tests of the (C)CAPM, we specify the pricing kernel as...

This paper studies the role of detrended wealth in predicting stock returns. We call a transitory movement in wealth one that produces a deviation from its shared trend with consumption and labor income. Using U.S. quarterly stock market data, we find that these trend deviations in wealth are...