We use a present-value model of the real exchange rate to impose structure on currency risk premium. allow premium depend both interest differential and latent component: missing Consistent with data, our implies that should predict returns. find premium, not differential, explains most variation in rate. Moreover, sheds light puzzling relations between rate,

This paper analyzes how model misspecification associated with both interest rate and mortality risk influences hedging decisions of insurance companies. For this purpose, diverse risk management strategies which are risk–minimizing when model risk is ignored come into consideration. The effectiveness of these strategies is investigated by looking at the distribution of the resulting hedging er...

I establish that inflation risk is priced in the cross section of stock returns: Stocks that have low returns during inflationary times command a risk premium. I estimate a market price of inflation risk that is comparable in magnitude to the price of risk for the aggregate market. Inflation is therefore a key determinant of risk in the cross section of stocks. The inflation premium cannot be e...

While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time-varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk-free rates, predictable risk premiums, and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analy...

Hou and Moskowitz (2005) document that common stocks with more price delay in reflecting information yield higher returns and that the delay premium cannot be explained by the CAPM, Fama-French three-factor model, or Carhart’s four-factor model. It cannot be explained by conventional liquidity measures either. They contend that the premium is attributable to inadequate risk sharing arising from...

We present an approach to the dynamic valuation of exposure risks in the multi-period setting, which incorporates a dynamic and multiple diversification of risks in Pareto optimal sense. This approach extends classical indifference premium principles and can be applied for the valuation of insurance risks. In particular, our method produces explicit computation formulas for the dynamic version ...

The paper derives many existing risk measures and premium principles by minimizing a Markov bound for the tail probability. Our approach involves two exogenous functions v(S) and (S,p) and another exogenous parameter ≤ 1. Minimizing a general Markov bound leads to the following unifying equation: , . z S v S E E p = ^ ] h g 8 6 B @ For any random variable, the risk measure p is the solution to ...

This paper studies the asset pricing implication of imprecise knowledge about rare events. Modeling rare events as jumps in the aggregate endowment, we explicitly solve the equilibrium asset prices in a pure-exchange economy with a representative agent who is averse not only to risk but also to model uncertainty with respect to rare events. The equilibrium equity premium has three components: t...

Ž . One of the expected benefits of membership of the Exchange Rate Mechanism ERM was a reduction in risk which should lead to a lower cost of capital and foster investment and growth. Using the APT, we investigate the behavior of the equity market risk premium for the London Stock Exchange prior to and during sterling’s membership of the ERM. We find that prior to and during the first year of ...