I study asset prices in a general equilibrium framework in which agents form habits over individual varieties of goods rather than over an aggregate consumption bundle. Goods are produced by monopolistically competitive firms whose elasticities of demand depend on consumers' habit formation. Firms that produce goods with a high habit level relative to consumption have low demand elasticities, set high prices for their product, have low expected returns on their stock, and have low asset pricing betas and stock return volatilities. I find supportive evidence for these predictions in the data.

The change in the cost of capital that results from a divestiture strategy can be closely approximated by a simple function of three parameters: (1) the fraction of socially conscious capital, (2) the fraction of targeted firms in the economy and (3) the return correlation between the targeted firms and the rest of the stock market. When calibrated to current data, we demonstrate that the impact on the cost of capital is too small to meaningfully affect real investment decisions. We then derive the conditions that would be required for the strategy to have a meaningful impact. We empirically corroborate our theoretical results by studying firm changes in ESG status and are unable to detect an impact of ESG divestiture strategies on the cost of capital of treated firms. Our results suggest that to have impact, instead of divesting, socially conscious investors should invest and exercise their rights of control to change corporate policy.

We propose a new method of testing asset pricing models that relies on quantities rather than just prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the risk model that is closest to the model that investors use in making their capital allocation decisions. Using our method, we assess the performance of the most commonly used asset pricing models in the literature.

Using the value that a mutual fund extracts from capital markets as the measure of skill, we find that the average mutual fund has used this skill to generate about $3.2 million per year. Large cross-sectional differences in skill persist for as long as ten years. Investors recognize this skill and reward it by investing more capital with better funds. Better funds earn higher aggregate fees, and a strong positive correlation exists between current compensation and future performance. The cross-sectional distribution of managerial skill is predominantly reflected in the cross-sectional distribution of fund size, not gross alpha.

We model a market for a skill in short supply and high demand, where the presence of charlatans (professionals who sell a service they do not deliver on) is an equilibrium outcome. In the model, reducing the number of charlatans through regulation lowers consumer surplus because of the resulting reduction in competition among producers. Producers can benefit from this reduction, potentially explaining the regulation we observe. The effect on total surplus depends on the type of regulation. We derive the factors that drive the cross‐sectional variation in charlatans (regulation) across professions.

We examine the importance of cross‐sectional asset pricing anomalies (alphas) for the real economy. To this end, we develop a novel quantitative model of the cross‐section of firms that features lumpy investment and informational inefficiencies, while yielding distributions in closed form. Our findings indicate that anomalies can cause material real inefficiencies, which raises the possibility that agents who help eliminate them add significant value to the economy. The model shows that the magnitude of alphas alone is a poor indicator of real outcomes, and highlights the importance of the alpha persistence, the amount of mispriced capital, and the Tobin's q of firms affected.

We summarize and extend the new literature on the term structure of equity. Short-term equity claims, or dividend strips, have higher average returns and Sharpe ratios than the aggregate stock market. The returns on short-term dividend claims are risky as measured by volatility, but safe as measured by market beta. These facts are hard to reconcile with traditional macro-finance models and we provide an overview of new models that can reproduce some of these facts. We relate our evidence on dividend strips to facts about other asset classes such as nominal and corporate bonds, volatility, and housing. We discuss the broader economic implications of our findings by linking the term structure of returns to real economic decisions such as hiring and investment. We conclude with an outline of empirical and theoretical extensions that we consider interesting avenues for future research.

Schulz (2016) replicates the findings of van Binsbergen, Brandt, and Koijen (2012)—henceforth, BBK—and agrees that the average pretax returns on short-term dividend strips are higher than those of the index, but argues that the after-tax returns are not. He thus provides a possible economic interpretation of the results in BBK: taxes. Schulz (2016) estimates the differential tax rates of dividends versus capital gains from ex-dividend day returns. We show that these estimated tax rates are suspect and imprecisely measured, peaking at over 100 percent in some periods. The results in BBK are robust to using tax rates from the literature (Sialm 2009). The arguments in Schulz (2016) thus crucially depend on implausibly large tax esti mates. We further discuss two other financial market imperfections discussed in the literature and show that they are also unlikely to explain the results in BBK.

We propose a latent variables approach within a present‐value model to estimate the expected returns and expected dividend growth rates of the aggregate stock market. This approach aggregates information contained in the history of price‐dividend ratios and dividend growth rates to predict future returns and dividend growth rates. We find that returns and dividend growth rates are predictable with values ranging from 8.2% to 8.9% for returns and 13.9% to 31.6% for dividend growth rates. Both expected returns and expected dividend growth rates have a persistent component, but expected returns are more persistent than expected dividend growth rates.

We decompose corporate bond and equity index returns into duration-matched government bond returns and the excess returns over this duration-matched counterfactual, which we term duration-adjusted returns. Compared with previously used excess return definitions (ie, returns in excess of Treasury bills), our decomposition leads to markedly different return patterns and asset pricing implications. In particular, we find that investment-grade bonds earn a small credit risk premium, comparable in magnitude to the convenience yield, and that duration adjustment resolves the CAPM’s failure to price corporate bonds. These findings highlight the importance of adjusting for nonstationary interest rate environments in asset pricing tests.