Using a small open economy framework, we model the composition of capital inflows as the equilibrium outcome of emerging market firms’ financing decisions. We show that debt limits, equity issuing costs, and foreign direct investment search costs generate a financing premium and that the ”cheapest” source of financing depends on the phase of the business cycle and past financing decisions. The ...

Downside and asymmtric risk measurement lends itself naturally to emerging equity markets, and offer an attractive alternative to traditional techniques.We investigate which of three models best fits the equity returns of emerging markets: CAPM, the Lower Partial Moment CAPM (LPM-CAPM), and an Asymmetric Response Model (ARM), and discuss implications for investment strategies and risk managemen...

We provide cross-country evidence to examine how financial market development affects innovation. Using a large data set including 34 developed as well as emerging countries, we differentiate the impacts of equity market and credit market development on a country’s innovation productivity measured by patenting. Our baseline results show that, while the development of equity markets encourages i...

This article examines how financial constraints and product market exposures determine the response of multinational and local firms to sharp depreciations. U.S. multinational affiliates increase sales, assets, and investment significantly more than local firms during, and subsequent to, depreciations. Differing product market exposures do not explain these differences in performance. Instead, ...

This paper examines the conditions required to guarantee positive prices in the CAPM. Positive prices imply an upper bound on the equity premium. This upper bound depends on the degree of diversity of firms’ fundamentals, and it is independent of investors’ preferences. In economies with realistically diverse assets the only positive-price CAPM equilibrium theoretically possible is a degenerate...

The equity premium puzzle shows that using standard parameters and setup, the Consumption-based Capital Asset Pricing Model’s (CCAPM’s) prediction of the premium associated with systematic risk is out by an order of magnitude. The object of this paper is to consider the implications of each of the broad classes of explanations of the equity premium puzzle for resource allocation, welfare and po...

Many stockholders irrationally believe that high recent market returns predict high future market returns. I argue that the presence of these extrapolative investors can help resolve the equity premium puzzle if the elasticity of intertemporal substitution (EIS) is greater than unity. Extrapolators’ overreaction to dividend news generates countercyclical expected returns. Rational investors res...

This paper studies international portfolio ßows of US investors to examine the information structure of international equity markets. Based on a model of portfolio choice with both public and private information, we propose new empirical measures of trades due to private information. We show that these trades help explain the cross section of international equity returns, after controlling for ...

This paper identifies the entrepreneur’s exposure to idiosyncratic risk as an important determinant of the demand for loans and the capital structure. The analysis is based on a sample of small and medium-sized private companies from the United States. The exposure to idiosyncratic risk is approximated by the share of personal net worth invested in one company (SNWI). Exposure to idiosyncratic ...

We study a production economy with regime switching in the conditional mean and volatility of productivity growth. The representative agent has generalized disappointment aversion (GDA) preferences. We show that volatility risk in productivity growth carries a positive and sizable risk premium in levered equity. Our model can endogenously generate long-run risks in the volatility of consumption...