This paper builds on Froot and Stein (1998) in developing a framework for analyzing the risk allocation, capital … with risk management and capital allocation; ii) some, but not all, of the risks they face can be frictionlessly hedged in … and hedging. We show that these features result in a three-factor model that determines the pricing and allocation of risk …

risk management; and ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach … allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be …

-systematic risk on the firm's choice of an optimal input mix. Consistent with earlier work in economics, this analysis demonstrates …

. More risk-averse entrepreneurs default earlier, but also choose higher leverage, even though leverage makes his equity more … risky. Non-diversified entrepreneurs demand both systematic and idiosyncratic risk premium. Cash-out option and external … equity further improve diversification and raise the entrepreneur's valuation of the firm. Finally, entrepreneurial risk …

Higher-beta and higher-volatility equities do not earn commensurately higher returns, a pattern known as the risk … anomaly. In this paper, we consider the possibility that the risk anomaly represents mispricing and develop its implications … for corporate leverage. The risk anomaly generates a simple tradeoff theory: At zero leverage, the overall cost of capital …

-generating strategy typically lowers the fund's risk-adjusted excess return due to frictions such as price pressure. When the manager is … via both management and incentive fees, we show that (i) the high-powered incentive fees encourage excessive risk taking … sufficiently poor fund performances substantially curtail managerial risk-taking, provide strong incentives to de-leverage, and …

Typical value-at-risk (VAR) calculations involve the probabilities of extreme dollar losses, based on the statistical … VAR values that are adjusted for risk aversion, time preferences, and other variations in economic valuation. In the … context of a representative agent equilibrium model, we construct an estimator of the risk-aversion coefficient that is …

bonds, greater risk-bearing capacity in the U.S. than the rest of the world, and nominal rigidities. A flight to safety … generates a dollar appreciation and decline in global output. Dollar bonds thus command a negative risk premium and the U ….S. holds a levered portfolio of capital financed in dollars. We quantify the effects of safety shocks and heterogeneity in risk …

these rejections are in part a consequence of the presence of omitted risk factors which are associated with nonzero risk … model should partially reflect exposure to these omitted sources of systematic risk and,hence, should help explain expected … residual risk effect in the previous literature:(1) nonlinearity of the residual risk effect and (2) the inadequacy of the …