Asset pricing.

• Position: National Bureau of Economic Research's Program on Asset Pricing

Members of the NBER's Program on Asset Pricing met in Cambridge on May 1. Organizers Wayne E. Ferson, NBER and University of Washington, and Program Director John Y. Campbell, NBER and Harvard University, selected the following papers for presentation:

Franklin Allen, University of Pennsylvania, and Douglas Gale, New York University, "Bubbles and Crises"

Discussant: Stanley E. Zin, NBER and Carnegie-Mellon University

Jonathan Lewellen, University of Rochester, and Jay A. Shahken, NBER and University of Rochester, "Market Efficiency, Rational Expectations, and Estimation Risk"

Discussant: Robert F. Stambaugh, NBER and Harvard University

William N. Goetzmann, NBER and Yale University; and Jonathan E. Ingersoll and Stephen Ross, Yale University, "High Water Marks"

Discussant: Brace N. Lehmann, University of California, San Diego

Jacob Boudoukh and Matthew Richardson, NBER and New York University; Richard Stanton, University of California, Berkeley; and Robert F. Whitelaw, New York University, "The Stochastic Behavior of Interest Rates: Implications from a Nonlinear, Continuous-Time, Multifactor Model"

Discussant: John H. Cochrane, NBER and University of Chicago

Jonathan Berk, NBER and University of Washington; Richard C. Green, Carnegie-Mellon University; and Vasant Naik, University of British Columbia, "Valuation and Return Dynamics of R&D Ventures"

Discussant: John C. Heaton, NBER and Northwestern University

Dimitris Bertsimas and Leonid Kogan, MIT; and Andrew W. Lo, NBER and MIT, "When Is Time Continuous?"

Discussant: Kenneth J. Singleton, NBER and Stanford University

Bubbles in which asset prices rise and then collapse are often followed by financial crises in which default is widespread. Allen and Gale develop a simple theory of bubbles based on an agency problem. Investors invest with money borrowed from banks. Risky assets are relatively attractive because investors can default in low payoff states, so there is asset substitution and prices are bid up. The overall level of asset prices depends on the amount of credit available. Risk can originate in both the real and financial sectors. Financial fragility may occur when credit expansion is not sufficient to insure that asset prices are high enough to prevent default.

In asset pricing, "estimation risk" refers to investor uncertainty about the parameters of the return or cash flow process. Lewellen and Shanken show that estimation risk can affect the time-series and cross-sectional...