This paper investigates how firms manage risk by examining the relationship between financial and operational hedging using a sample of bank holding companies. Risk management theory holds that capital market imperfections make cash flow volatility costly. I investigate whether financial firms...

We integrate a case-based model of probability judgment with prospect theory to explore asset pricing under uncertainty. Research within the "heuristics and biases" tradition suggests that probability judgments respond primarily to case-specific evidence and disregard aggregate characteristics...

Contingent capital in the form of debt that converts to equity when a bank faces financial distress has been proposed as a mechanism to enhance financial stability and avoid costly government rescues. Specific proposals vary in their choice of conversion trigger and conversion mechanism. We...

We use the popular television show <i>Mad Money</i>, hosted by Jim Cramer, to test theories of attention and limits to arbitrage. Stock recommendations on <i>Mad Money</i> constitute attention shocks to a large audience of individual traders. We find that stock recommendations lead to large overnight returns...

We correlate analysts' forecast errors with temporal variation in investor sentiment. We find that when sentiment is high, analysts' forecasts of one-year-ahead earnings and long-term earnings growth are relatively more optimistic for "uncertain" or "difficult-to-value" firms. Adding these...

This paper shows that an important link between investor sentiment and firm overvaluation is optimistic earnings expectations, and that management earnings guidance helps resolve sentiment-driven overvaluation. Using previously identified firm characteristics, we find that most of the negative...

Unspanned stochastic volatility (USV) refers to the inability of bonds to replicate volatility-sensitive derivative securities. Affine term structure models require special restrictions on the parameters to exhibit USV. We use a joint Eurodollar futures and options data set to estimate affine...

We investigate the long-standing puzzle on the underpricings of convertible bonds. We hypothesize that the observed underpricing is induced by the possibility that a convertible bond might renegotiate on some of its covenants, e.g., an imbedded put option in financial difficulties. Consistent...

Linear programming is applied to measurement of whole life insurance to obtain a functional relationship between interest adjusted cost of insurance protection and rate of return on policy equity. For comparative purposes, policy differences related to premium rates, dividends and cash-values...