The goal of this article is an estimate of the objective forward-looking U.S. equity risk premium relative to bonds through history—specifically, since 1802. For correct evaluation, such a complex topic requires several careful steps: To gauge the risk premium for stocks relative to bonds, we need an expected real stock return and an expected real bond return. To gauge the expected real bond re...

Stock returns could be predictable due to time-varying expected returns. In this paper, we model the conditional expected return as an unobservable state variable affected directly by the expected components of predictors. This approach separates the different roles played by expected versus unexpected predictors, while avoiding both the “error-in-variables” problem due to imperfect predictors ...

Given two virtually separate literatures on return predictability and the risk-return relation, this paper reconciles the two literatures by investigating the underlying mechanism of the return predictability literature through exploiting the risk-return relation. In developing an empirical model to examine the business cycles-risk-return relationship, we consider the fact that market volatilit...

A connection between the notion of information and the concept of risk and return in portfolio theory is deduced. This succeeds in two steps: A general moment-return relation for arbitrary assets is derived, thereafter the total expected return is connected to the Kullback-Leibler information. With this result the optimization problem to maximize the expected return of a portfolio consisting of...

In this paper, we address the problem of maximizing expected return subject to a worst case return constraint by composing a portfolio that may consist of cash, holdings in a stock market index and options on the index. We derive properties of optimal and feasible portfolios and present a linear programming model to solve the problem. The optimal portfolios have pay-off functions that reflect a...

The banks’ response to their changes in leverage ratios is examined and evaluated in this paper. This reaction can be interpreted as if the coefficient of total debts to equity (lev1) and total assets to equity (lev2) are positive as anticipated in the banking network of Iran. The paper uses data from 31 Iranian banks’ annual databases during the course of 2006-13 in order to estimate an empiri...

We characterize the joint dynamics of expected returns, stochastic volatility, and prices. In particular, with a given dividend process, one of the processes of the expected return, the stock volatility, or the price-dividend ratio fully determines the other two. For example, the stock volatility determines the expected return and the price-dividend ratio. By parameterizing one, or more, of exp...

We consider a sovereign wealth fund that invests broadly in the international financial markets. The influx to has stopped. adopt life cycle model and demonstrate optimal spending rate from is significantly less than fund’s expected real of return. secures will last ”forever”. Spending return deplete with probability one. Moreover, this strategy inconsistent portfolio choice. Our results are co...