Abstract
We solve analytically a pure exchange general equilibrium model with a continuum of agents and two key elements: Reference-dependent preferences (in the form of habit formation) and stochastic disagreement (from fluctuating information quality). The model explains the equity premium, the stock price volatility, and the empirical relation between forecast dispersion and different properties of asset prices. We evaluate its quantitative implications and show that the usual asset pricing channels of disagreement in the literature are not quantitatively important, while information quality is as important as reference-dependent preferences.
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