When people share risk in financial markets, intermediaries provide costly enforcement for most trades and, hence, are an integral part of financial marketsu0092 organization. We assess the degree of risk sharing that can be achieved through financial markets when enforcement is based on the...

A conditional asset pricing model with risk and uncertainty implies that the time-varying exposures of equity portfolios to the market and uncertainty factors carry positive risk premiums. The empirical results from the size, book-to-market, and industry portfolios as well as individual stocks...

We analyse the relationships between return calculation methods, risk and observation periods. We show that the mean of a return set calculated using logarithmic returns is less than the mean calculated using simple returns by an amount related to the variance of the set. This implies that there...

In financial economics, numerous theoretical models explain the relationship between investment risk and return in the capital market, one of the most common being the Capital Asset Pricing Model (CAPM). After reviewing the literature in this area, this study discusses the theoretical background...

We consider the optimal asset allocation choice of an investor who can invest in <p> cash (a money market bank account), nominal bonds, and stocks (the stock index). <p> The investor faces an incomplete market setting and is not able to perfectly hedge <p> long run real interest rate risk using the...</p></p></p>

The distinction of risk vs uncertainty as made by Knight has important implications for policy selection. Assuming the former when the latter is relevant can lead to wrong decisions. With the aid of a stylized model that describes a bank’s decision on how to allocate loans, the authors discuss...

Our results uncover a so far undocumented ability of the interbank market to distinguish between banks of different quality in times of aggregate distress. We show empirical evidence that during the 2007 financial crisis the inability of some banks to roll over their interbank debt was not due...

From 1963 through 2015, idiosyncratic risk (IR) is high when market risk (MR) is high. We show that the positive relation between IR and MR is highly stable through time and is robust across exchanges, firm size, liquidity, and market-to-book groupings. Though stock liquidity affects the...

The rare disaster hypothesis suggests that the extraordinarily high postwar U.S. equity premium resulted because investors ex ante demanded compensations for unlikely but calamitous risks that they happened not to incur. While convincing in theory, empirical tests of the rare disaster...

A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the...