We study the effect of introducing a new security, such as a non-redundant derivative, on the volatility of stock … risk aversion. We solve for equilibrium in two versions of this economy. In the first version, risk-sharing opportunities … increases the volatility of stock-market returns. …

? Can stock return predictability be explained by changes in stock market volatility? How does the mean return per unit risk … predictor of both the mean and volatility of excess stock market returns. We characterize the risk-return tradeoff as the … change over time? This chapter reviews what is known about the time-series evolution of the risk-return tradeoff for stock …

commensurate with their risk aversion; more risk-averse individuals pick lower-volatility stocks. The investors' portfolio …The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks with volatilities … consistent with the predictions of the hypothesis: the portfolios contain highly similar stocks in terms of volatility, when …

illustrated with an application to a simple risk management exercise. …

futures contracts. Their hedging demand is met by financial intermediaries who act as speculators, but are constrained in risk …-taking. Increases (decreases) in producers’ hedging demand (the risk-bearing capacity of speculators) increase the costs of hedging … 1980-2006, we show that producers’ hedging demand - proxied by their default risk - forecasts spot prices, futures prices …

contained in the volatility risk premium and option-implied skewness increases substantially Sharpe ratios and certainty … weights, one needs to estimate for each stock its volatility, correlations with all other stocks, and expected return. Our …