We propose a unified model of limited market integration, asset-price determination, leveraging, and contagion. Investors and firms are located on a circle, and access to markets involves participation costs that increase with distance. Due to a complementarity between participation and leverage decisions, the equilibrium may exhibit diverse leverage and participation choices across investors, although investors are ex ante identical. Small changes in market-access costs can cause a change in the type of equilibrium, leading to discontinuous price changes, deleveraging, and portfolio-flow reversals. Moreover, the market is subject to contagion—an adverse shock to investors in some locations affects prices everywhere.

We study the asset‐pricing implications of technological growth in a model with “small,” disembodied productivity shocks and “large,” infrequent technological innovations, which are embodied into new capital vintages. The technological‐adoption process leads to endogenous cycles in output and asset valuations. This process can help explain stylized asset‐valuation patterns around major technological innovations. More importantly, it can help provide a unified, investment‐based theory for numerous well‐documented facts related to excess‐return predictability. To illustrate the distinguishing features of our theory, we highlight novel implications pertaining to the joint time‐series properties of consumption and excess returns.

Extremely long odds accompany the chance that spurious-regression bias accounts for investor sentiment׳s observed role in stock-return anomalies. We replace investor sentiment with a simulated persistent series in regressions reported by Stambaugh, Yu, and Yuan (2012), who find higher long-short anomaly profits following high sentiment, due entirely to the short leg. Among 200 million simulated regressors, we find none that support those conclusions as strongly as investor sentiment. The key is consistency across anomalies. Obtaining just the predicted signs for the regression coefficients across the 11 anomalies examined in the above study occurs only once for every 43 simulated regressors.

Investor preferences for holding speculative assets are likely to be more pronounced ahead of firms’ earnings announcements, probably because of lower inventory costs and immediate payoffs or because of enhanced investor attention. We show that the demand for lottery-like stocks is stronger ahead of earnings announcements, leading to a price run-up for these stocks. In sharp contrast to the standard underperformance of lottery-like stocks, lottery-like stocks outperform non-lottery stocks by about 52 basis points in the 5-day window ahead of earnings announcements. However, this return spread is reversed by 80 basis points in the 5-day window after the announcements. Moreover, this inverted-V-shaped pattern on cumulative return spreads is more pronounced among firms with a greater retail order imbalance, among firms with low institutional ownership, and in regions with a stronger gambling propensity, and it is also robust after controlling for past 12-month returns and various proxies for investor attention.

This paper studies the heterogeneous effects of subjective macroeconomic expectations on the cross-section of equity returns. We argue that an upward revision in expectations of macroeconomic productivity might be accompanied by an excessive increase in investment and external financing, inflated current equity prices, and thus lowered subsequent returns, particularly for financially constrained firms. Thus, following upward revisions in expectations of macroeconomic productivity, subsequent returns are relatively low for small firms, value firms, low-investment firms, risky firms, unprofitable firms, low-quality firms, and financially distressed firms—all of which are more financially constrained. In sharp contrast, following downward revisions in expectations of macroeconomic productivity, these categories of firms earn relatively high subsequent returns. We find that revisions in subjective macroeconomic expectations induce strong predictable time variation in a large set of anomalies. In particular, favorable revisions in expectations of macroeconomic productivity predict significantly stronger profitability, quality, distress, and low-risk anomalies but weaker value, investment, and size anomalies.

Buying is easier than shorting for many equity investors. Combining this arbitrage asymmetry with the arbitrage risk represented by idiosyncratic volatility (IVOL) explains the negative relation between IVOL and average return. The IVOL‐return relation is negative among overpriced stocks but positive among underpriced stocks, with mispricing determined by combining 11 return anomalies. Consistent with arbitrage asymmetry, the negative relation among overpriced stocks is stronger, especially for stocks less easily shorted, so the overall IVOL‐return relation is negative. Further supporting our explanation, high investor sentiment weakens the positive relation among underpriced stocks and, especially, strengthens the negative relation among overpriced stocks.

Previous research has revealed that return spreads between stocks with high and low characteristics-based factor beta remain insignificant. This study investigates the time variation in the pricing of various characteristics-based factors, uncovering a notable two-regime pattern: high-beta portfolios yield higher returns than low-beta portfolios after high-sentiment periods, while the opposite occurs after low-sentiment periods. Remarkably, this two-regime pattern is completely reversed for macro factors. Mutual fund and hedge fund returns corroborate these findings. Our results suggest that exposure to characteristics-based factors likely represents mispricing levels, particularly during high-sentiment periods, whereas exposure to macro factors likely represents risk, particularly during low-sentiment periods.