Average return differences among firms sorted on valuation ratios, past investment, prof-itability, market beta, or idiosyncratic volatility are largely driven by differences in exposures offirms to the same systematic factor related to embodied technology shocks. Using a calibratedstructural...

Actuaries manage risk, and asset price volatility is the most fundamental parameter in models of risk management. This study utilizes recent advances in econometric theory to decompose total asset price volatility into a smooth, continuous component and a discrete (jump) component. We analyze a...

Under what conditions can the term structure of risk premia be downward sloping, as reported in a number of recent empirical studies? I study fixed income and equity risk premium term structures and the long run risk in a continuous time Lucas-style economy subject to a persistent regime change...

We present a dynamic model for the joint evolution of the balance sheet, equity stock price, and the credit default spread (CDS). We illustrate why the structural default model cannot explain the dynamics of CDS rates. We then introduce the credit risk-premium to model spikes in CDS rates during...

This article examines downside risk premiums using S&P 500 index (SPX) options. Portfolios are constructed using the index options to replicate the downside risk factors and their average excess returns provide estimates of downside risk premiums. We show that all the market risk premium comes...

In this article, we propose an equilibrium pricing rule for the contingent claims by applying the economic premium principle initiated by Buhlmann (1980). The derivative markets in our model are over-the-counter (OTC) markets and have counterparty risks. We reconstruct the economic premium...

This paper investigates the role of volatility risk on stock return predictability specified on two global financial crises: the dot-com bubble and recent financial crisis. Using a broad sample of stock options traded at the American Stock Exchange and the Chicago Board Options Exchange (CBOE)...

A growing body of literature analyses the impact of news on companies' equity prices. We add to this literature by showing that the transmission of news to prices goes through a combination of changing earnings expectations and risk premia. First, we disentangle sectoral equity prices into...

A growing body of literature analyses the impact of news on companies' equity prices. We add to this literature by showing that the transmission channel of news to prices differs across sectors. First, we disentangle sectoral equity prices into components of expected future earnings and equity...

We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call "risk shifts", are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion's share of...