What is the cross-sectional relationship between financial leverage and expected equity returns? How is the empirical relationship associated with firm's financial decisions? This paper investigates the potential explanations for the flatness relation between financial leverage and expected...

In this work Massimo Morini and Andrea Prampolini argue that KVA is a component of profit turned into a valuation adjustment as a by-product of regulatory constraints based on a conservative consideration of market hedges. The regulatory foundations of KVA are analyzed from RWAs to the Leverage...

A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are...

This paper studies the implications of trading frictions in financial markets for firms' investment and dividend choices and their aggregate consequences. When equity shares trade in frictional asset markets, the firm's problem is time-inconsistent, and it is as if it faces quasi-hyperbolic...

Equity-linked notes are flexible financial products that give investors favorable capital treatment. The payoff of a note depends on the performance of a basket of equities or indices averaged over a certain period, but is bounced below by a guaranteed amount. This article presents a new model...

We provide robust empirical evidence that uncovers the reason for the observed closer relationship between the bond market versus the equity market and the macroeconomy. Our results indicate that the tight bond market-macroeconomy link is not due to differences in the investor base, but instead...

A deep-ingrained doctrine in asset pricing says that if an empirical characteristic-return relation is consistent with investor “rationality,” the relation must be “explained” by a risk (factor) model. The investment approach questions the doctrine. Factors formed on characteristics are...

We find out-of-sample predictability of commodity futures excess returns using forecast combinations of 28 potential predictors. Such gains in forecast accuracy translate into economically significant improvements in certainty equivalent returns and Sharpe ratios for a mean-variance investor....

Starting from the Merton framework for firm defaults, we provide the analytics and robustness of the relationship between default correlations. We show that loans with higher default probabilities will not only have higher variances but also higher correlations between loans. As a consequence,...

This study examines the relationship between corporate managers' political ideology and corporate leverage policies conditional on investor sentiment. Based on a minimum of 21,884 observations over the 1992-2008 period, the authors show that Republican managers significantly reduce leverage...