How investors should hedge the currency risk component of their international stock portfolios is the subject of much debate. In this paper, we add to the existing literature in a number of ways. First, we focus on conditional portfolio and hedging decisions by using a recursive vector autoregression model to identify a shock arising in the money, equity or currency markets. We treat all of the...

The sharp increase in equity prices over the 1990s was widely attributed to permanently higher productivity growth derived from the New Economy. This paper establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions, productivity advances can only have temporary effects on the fundamentals of equity prices. Using historical...

Several authors have investigated whether the weak relation between equity market returns and market volatility is due to the omission of risk factors that link variations of the investment opportunity to changes in economic conditions. It has been well known since Merton (1971, 1973) that, when investment opportunities are time varying, dynamic hedging is necessary for forward-looking investor...

Beta as a measure of risk has been under fire for many years. Although practitioners still widely use the CAPM to estimate the cost of equity of companies, they are aware of its problems and are looking for alternatives. A possible alternative is to estimate the cost of equity based on the semideviation. a well-known and intuitively plausible measure of downside risk. Complementing evidence rep...

The tax preference for interest payments by corporations as compared to dividend payments is a long surviving feature of many tax systems. Many have argued that there is no reason for this preference and so it distorts the capital structure of corporations needlessly. This article argues that because the returns to equity are more positively skewed as compared to debt, individual investors will...

The increase in equity prices over the 1990s has to a large degree been attributed to permanently higher productivity growth that is derived from the ‘new economy’ and related research and development (R&D) expenditures. This paper establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions, productivity advances can only h...

Moody’s analysts and sell-side equity analysts adjust GAAP earnings as part of their research. We show that adjusted earnings definitions of Moody’s analysts are significantly lower than those of equity analysts when companies exhibit higher downside risk, as measured by volatility in idiosyncratic stock returns, volatility in negative market returns, poor earnings, and loss status. Relative to...