This study reexamines the relation between downside beta and equity returns in the U.S. First, we replicate Ang, Chen and Xing (2006) who find a positive relation between downside beta and future equity returns for equal-weighted portfolios of NYSE stocks. We show that this relation doesn't hold...

Recently, Ross (2015) showed that the real-world probability distribution of a discrete Markovian state variable can be recovered from observed option prices. The so-called recovery theorem follows from Perron-Frobenius matrix theory when the pricing kernel is transition independent. In this...

We model an order book with liquidity rebates (make fees) and trading fees (take fees) that faces intermarket competition, and use the models insights to explain changes in market quality and market shares following changes in make-take fees. As predicted by our model, we document that fee...

We test the pricing of the conditional systematic risk (β) of IML, a traded liquidity factor of the return premium on illiquid-minus-liquid stocks, with its risk premium varying over time. We find a positive and significant risk premium on conditional IML β, which rises in times of financial...

We examine the consistency of several prominent multifactor models from the empirical asset pricing literature with the Arbitrage Pricing Theory (APT) framework. We follow the APT-related literature and estimate the common factor structure from a rich cross-section (associated with 42 major CAPM...

Prior studies on ‘cash flow' beta primarily use return on equity as the basis for estimating systematic risk. However, the way a conservative accounting system deals with uncertainty makes return on equity less suitable to use as the basis for estimating ‘earnings' beta. I argue that since...

We offer a new social approach to investment decision making and asset prices. Investors discuss their strategies and convert others to their strategies with a probability that increases in investment returns. The conversion rate is shown to be convex in realized returns. Unconditionally, active...

Following the recent financial crisis, increasing the transparency of credit default swap (CDS) markets has been a popular goal among regulators. We examine how changes in the transparency of the CDS market can impact liquidity in the corresponding equity market. We first extend a model of...

We estimate a discrete approximation of the risk-return trade-off for the US market by using the whole universe of stocks from July 1963 to September 2017. We find the relationship between return and risk to be time-varying and also dependent on the level of risk considered. The proposed...

We show that aversion to risk and ambiguity leads to information inertia when investors process public news about assets. Optimal portfolios do not always depend on news that is worse than expected; hence, the equilibrium stock price does not reflect this bad news. This informational inefficiency...