In this note we represent the well known discrete time stochastic volatility (SV) model with a leverage effect and the SV model of Jacquier, Polson and Rossi (JPR) (2002) using Gaussian nonlinear state space forms with uncorrelated measurement and transition errors. With the new representations, we show that the JPR specification does not necessarily lead to a leverage effect and hence is not t...

We uncover significant effects of jump risk on conditional equity premium. Realized volatility due to negative or “bad” (positive or “good”) jumps in stock market prices predicts a rising (falling) near-term equity premium. The forecasting power of signed jump risk measures remains statistically significant even when we control for variance risk premium that Drechsler and Yaron (2011) attribute...

I study asset prices in a two-agent production economy in which the worker has private information about her labor productivity. The shareholder offers an incentive compatible long-term labor contract, which partially insures the worker against labor income risk. I compare the model’s performance to settings with a competitive labor market, and with static labor contracts. My model successfully...

Using sovereign CDS spreads and currency option data for Mexico and Brazil, we document that CDS spreads covary with both the currency option implied volatility and the slope of the implied volatility curve in moneyness. We propose a joint valuation framework, in which currency return variance and sovereign default intensity follow a bivariate diffusion with contemporaneous correlation. Estimat...

The anomalies literature in capital markets research in finance and accounting is based (almost) exclusively on average realized returns. In contrast, we construct accountingbased expected returns for dollar-neutral long-short trading strategies formed on a wide array of anomaly variables, including book to market, size, composite issuance, net stock issues, abnormal investment, asset growth, i...

Wary consumers overlook gains but not losses in remote sets of dates or states. As preferences are upper but not lower Mackey semi-continuous, Bewley’s (1972) [4] result on existence of equilibrium whose prices are not necessarily countably additive holds. Wariness is related to lack of myopia and to ambiguity aversion (and, therefore, to Bewley’s (1986) [6] work on Knightian uncertainty). Wary...

This paper examines how U.S. multinational firms are affected by foreign currency movements. In light of detailed exchange rate data, we find that 29% of our sample of 935 U.S. firms with real operations in foreign countries is significantly affected by currency movements between 1990 and 2001. Results show moreover that U.S. stock returns react asymmetrically to currency movements. By introduc...

We assess the effect of four short-sale constraints on stock returns in isolation and in combination, in generally falling versus generally rising markets, and considering relative effects for large/mid cap versus small/micro cap firms. We find that across our variety of model specifications, there is substantial evidence that our more fully specified model provides considerable additional expl...

In a two-period pure exchange economy with financial assets, a temporary financial equilibrium is an equilibrium of the current spot and security markets given forecasts of future prices and returns. The temporary equilibrium model can then be interpreted as a Walrasian model where preferences depend on prices. This idenfication implies, among other consequences, the generic determinateness of ...

Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is base...