Asset Pricing.

• Position: Bureau News - Panel Discussion

The NBER's Program on Asset Pricing met in Chicago on April 9. Deborah J. Lucas, NBER and Northwestern University, and Amir Yaron, NBER and The Wharton School, organized this program:

Dimitri Vayanos, NBER and MIT, "Flight to Quality, Flight to Liquidity, and the Pricing of Risk" (NBER Working Paper No. 10327)

Discussant: Andrea Eisfeldt, Northwestern University

Anthony W. Lynch, NBER and New York University, and Sinan Tan, New York University, "Explaining the Magnitude of Liquidity Premia: The Roles of Return Predictability, Wealth Shocks, and State-Dependent Transaction Costs"

Discussant: John C. Heaton, NBER and University of Chicago

Xiaohong Chen, New York University, and Sydney C. Ludvigson, NBER and New York University, "Land of Addicts? An Empirical Investigation of Habit-Based Asset Pricing Models"

Discussant: David Chapman, Boston College

Michael Gallmeyer and Burton Hollifield, Carnegie Mellon University, "An Examination of Heterogeneous Beliefs with a Short Sale Constraint"

Discussant: George M. Constantinides, NBER and University of Chicago

John H. Cochrane, NBER and University of Chicago; and Francis A. Longstaff and Pedro Santa-Clara, NBER and University of California, Los Angeles, "Two Tree: Asset Price Dynamics Induced by Market Clearing"

Discussant: Ravi Bansal, Duke University

Xavier Gabaix, NBER and MIT; Arvind Krishnamurthy, Northwestern University; and Olivier Vigneron, Deutsche Bank, "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market"

Discussant: John Geanakoplos, Yale University

Vayanos proposes a dynamic equilibrium model of a multi-asset market with stochastic volatility and transaction costs. His key assumption is that investors are fund managers, subject to withdrawals when fund performance falls below a threshold. This generates a preference for liquidity that varies over time and increases with volatility. He shows that during volatile times, the liquidity premiums on assets increase; investors become more risk averse; assets become more negatively

correlated with volatility; pairwise correlations of assets can increase; and market betas of illiquid assets increase. Moreover, an unconditional Capital Asset Pricing Model (CAPM) can understate the risk of illiquid assets because they become riskier when investors are the most risk averse.

Lynch and Tan examine dynamic portfolio choice with transaction costs. In particular, the authors allow returns to be predictable and...