We use a stochastic frontier model to obtain a stock-level estimate of the difference between a firm's installed production capacity and its optimal capacity. We show that this “capacity overhang” estimate relates significantly negatively to the cross-section of stock returns, even when...

In an equilibrium Black and Scholes (1973) economy, a firm's default risk and its expected equity return are non-monotonically related. This may explain the surprising relation found between these two variables in recent empirical research. Although changes in default risk induced by expected...

Recent empirical studies show that statistical forecasts of a stock's return skewness negatively price stocks, apparently consistent with recent theoretical studies. While the theoretical studies, however, focus on skewness over long return horizons, the empirical studies focus on skewness over...

We study the effect of an asset's volatility on the expected returns of European options written on the asset. A simple stochastic discount factor model suggests that the effect differs depending on whether variations in volatility are due to variations in systematic or idiosyncratic volatility....

This study constructs a novel dataset of bankruptcy filings for a large sample of non-US firms in 14 developed markets and sheds new light on the cross-sectional relation between default risk and stock returns. Using the reduced-form approach of Campbell et al. (2008) to estimate default...