Two Trees
(with Francis Longstaff and Pedro Santa-Clara), Review of Financial Studies 21 (1) 2008 347-385. We solve the model with two Lucas trees, iid dividends and log utility. Surprise: it has interesting dynamics. If one stock goes up it is a larger share of the market. Its expected return must rise so that people are willing to hold it despite its now larger share. Typo: Equation 39 (page 363), the numerator should read (1-s/(1-s))ln(s)/V, not 1-s/(1-s)ln(s)/V. Thanks to Egor Malkov.