This article explores the causes and consequences of cross-country variation in mortgage market structure. It draws on insights from several fields: urban economics, asset pricing, behavioral finance, financial intermediation, and macroeconomics. It discusses lessons from the credit boom, the challenges of mortgage modification in the aftermath of the boom, consumer financial protection, and alternative mortgage forms and funding models. The article argues that the USA has much to learn from mortgage finance in other countries, and specifically from the Danish implementation of the European covered bonds system.

In monthly U.S. data for 1959–1979 and 1979–1983, the state of the term structure of interest rates predicts excess stock returns, as well as excess returns on bills and bonds. This paper documents this fact and uses it to examine some simple asset pricing models. In 1959–1979, the data strongly reject a single-latent-variable specification of predictable excess returns. There is considerable evidence that conditional variances of excess returns change through time, but the relationship between conditional mean and conditional variance is reliably positive only at the short end of the term structure.

This paper studies asset pricing in a general equilibrium representative agent exchange model. The assumptions of isoelastic period utility and lognormal endowment allow the derivation of closed-form solutions for asset returns without restricting the serial correlation of the log endowment. Risk premiums on stocks and real bonds are found to be simple functions of relative risk aversion, the variance of the log endowment innovation, and the weights in the moving average representation of the log endowment. The paper analyzes the sign of term premiums, the size of the equity premium, and the effect of taste shocks on asset prices.

This lecture considers the case for consumer financial regulation in an environment where many households lack the knowledge to manage their financial affairs effectively. The lecture argues that financial ignorance is pervasive and unsurprising given the complexity of modern financial products, and that it contributes meaningfully to the evolution of wealth inequality. The lecture uses a stylized model to discuss the welfare economics of paternalistic intervention in financial markets, and discusses several specific examples including asset allocation in retirement savings, fees for unsecured short-term borrowing, and reverse mortgages.

The study of household finance is challenging because household behavior is difficult to measure, and households face constraints not captured by textbook models. Evidence on participation, diversification, and mortgage refinancing suggests that many households invest effectively, but a minority make significant mistakes. This minority appears to be poorer and less well educated than the majority of more successful investors. There is some evidence that households understand their own limitations and avoid financial strategies for which they feel unqualified. Some financial products involve a cross‐subsidy from naive to sophisticated households, and this can inhibit welfare‐improving financial innovation.

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade‐off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor (SDF) that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas patterns of risk premia restrict its conditional volatility and factor structure. Stylized facts about interest rates, aggregate stock prices, and cross‐sectional patterns in stock returns have stimulated new research on optimal portfolio choice, intertemporal equilibrium models, and behavioral finance.

Expectations theories of asset returns may be interpreted as stating either that risk premia are zero, or that they are constant through time. Under the former interpretation, different versions of the expectations theory of the term structure are inconsistent with one another, but I show that this does not necessarily carry over to the constant risk premium interpretation of the theory. Furthermore, I argue that differences among expectations theories are of 'second order" in a precise mathematical sense. I present an approximate linearized framework for analysis of the term structure in which these differences disappear, and I test its accuracy in practice using data from the CRSP government bond tapes.

This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in forecasts of future stock returns (to capture intertemporal hedging effects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns but, in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk.

We show that reaching for yield—a tendency to take more risk when the real interest rate declines while the risk premium remains constant—results from imposing a sustainable spending constraint on an otherwise standard infinitely lived investor with power utility. When the interest rate is initially low, reaching for yield intensifies. The sustainable spending constraint also affects the response of risk-taking to a change in the risk premium, which can even change sign. In a variant of the model where the sustainable spending constraint is formulated in nominal terms, low inflation also encourages risk-taking.

It seems plausible that an increase in stock market volatility raises required stock returns, and thus lowers stock prices. We develop a formal model of this volatility feedback effect using a simple model of changing variance (a quadratic generalized autoregressive conditionally heteroskedastic, or QGARCH, model). Our model is asymmetric and helps to explain the negative skewness and excess kurtosis of U.S. monthly and daily stock returns over the period 1926–1988. We find that volatility feedback normally has little effect on returns, but it can be important during periods of high volatility.