Despite the theoretical prediction that options improve market efficiency, this study finds that option trading does not attenuate the well-known idiosyncratic volatility anomaly, i.e., the negative relation between idiosyncratic volatility and subsequent stock returns. We argue that the...

We show that the slight possibility of a macroeconomic disaster of moderate magnitude can explain important features across credit, option, and equity markets. Our consumption-based equilibrium model captures the empirical level and volatility of credit spreads, generates a flexible credit term...

We embed systematic default, pro-cyclical recovery rates and habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and show that a single set of structural parameters calibrated to...