We develop a dynamic model where heterogeneous firms take investment decisions depending on their beliefs on future carbon prices. A policy-maker announces a forward-looking carbon price schedule but can decide to default on its plans if perceived transition risks are high. We show that weak policy commitment, especially when combined with ambitious mitigation announcements, can trap the economy into a vicious circle of credibility loss, carbon-intensive investments and increasing risk perceptions, ultimately leading to a failure of the transition. The presence of behavioural frictions and heterogeneity both in capital investment choices and in the assessment of the policy-maker’s credibility has strong non-linear effects on the transition dynamics and the emergence of ‘high-carbon traps’. We identify analytical conditions leading to a successful transition and provide a numerical application for the EU economy.

The thesis of this essay is that, in heterogeneous agent macroeconomics, the assumption of rational expectations about equilibrium prices is unrealistic and should be replaced. Rational expectations imply that decision makers forecast equilibrium prices like interest rates by forecasting cross-sectional distributions. This leads to an extreme version of the curse of dimensionality: dynamic programming problems in which the entire distribution is a state variable (‘Master equation’ a.k.a. ‘Monster equation’). Frontier computational methods struggle with these infinite-dimensional Bellman equations, making it implausible that real-world agents solve the associated decision problems. These difficulties also limit the applicability of the heterogeneous-agent approach to central questions in macroeconomics – those involving aggregate risk and non-linearities such as financial crises. This troublesome feature of the rational expectations assumption poses a challenge: what should replace it? I outline three criteria for alternative approaches: (1) computational tractability, (2) consistency with empirical evidence, and (3) (some) immunity to the Lucas critique. I then discuss several promising directions, including temporary equilibrium approaches, incorporating survey expectations, least-squares learning, and reinforcement learning.

This study examines the role of skewness as a priced risk factor in the Thai stock market, drawing on both rational and behavioral asset pricing theories. Theoretically, skewness captures return asymmetry that investors may price due to downside risk aversion or misprice due to lottery-seeking behavior. Using daily data from 2005 to 2024, we construct decile portfolios based on lagged skewness and find a significant negative relationship between skewness and future returns. A long-short strategy that buys stocks with the lowest skewness and shorts those with the highest yields an average exces

"We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors trade a stock with limited float because of insider lock-ups. They have heterogeneous beliefs due to overconfidence and face short-sales constraints. A bubble arises as price overweighs optimists' beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble's size depends on float as investors anticipate an increase in float with lock-up expirations and speculate over the degree of insider selling. Consistent with the internet experience, the bubble, tu