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Working Paper
Replicating Business Cycles and Asset Returns with Sentiment and Low Risk Aversion
This paper develops a real business cycle model with eight fundamental shocks andone ìequity sentiment shockî that captures belief-driven áuctuations. I solve for thetime series of shock realizations that allow the model to exactly replicate the observedtime paths of U.S. macroeconomic variables and asset returns over the past six decades.The representative agentís perception that movements in equity value are partly drivenby sentiment is close to self-fulÖlling. The model-identiÖed sentiment shock is stronglycorrelated with other fundamental shocks and implies ìpessimismîrelative to ...
Working Paper
Effects of Information Overload on Financial Markets: How Much Is Too Much?
Motivated by cognitive theories verifying that investors have limited capacity to process information, we study the effects of information overload on stock market dynamics. We construct an information overload index using textual analysis tools on daily data from The New York Times since 1885. We structure our empirical analysis around a discrete-time learning model, which links information overload with asset prices and trading volume when investors are attention constrained. We find that our index is associated with lower trading volume and predicts higher market returns for up to 18 ...