Spontaneous Cognition Equilibrium

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1. Motivation This note develops an information-based asset pricing model based on Tirole (2009) where thinking through market contingencies is costly and fear of missing an important detail restrains trading behavior. For example, think about a … [Continue reading]

Factors vs. Characteristics

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1. Introduction Fama and French (1993) found that both a firm's size and its book-to-market ratios are highly correlated with its average excess return as illustrated in Figure 1 below. For instance, the center panel says that stocks with low … [Continue reading]

Effective Financial Theories

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1. Introduction One of the most astonishing things about financial markets is that there is interesting economics operating at so many different scales. Yet, no one would ever guess this fact by looking at standard asset pricing theory. To … [Continue reading]