This article analyzes the role of liquidity in the sovereign credit default swap (CDS) market. We employ a continuous-time specification to incorporate illiquidity as an additional pricing factor of default swap contracts for the most developed economies. The illiquidity discount process is...

We set up a model where asset price bubbles due to risk shifting can be moderated by capital requirements. However, imperfect information about the ratio of required capital, or, in the context of the sub-prime crisis, the extent of regulatory arbitrage, introduces uncertainty about the risk...

This paper proposes a new approach to infer a firm-specific measure of the implied cost of capital. It incorporates endogenously estimated industry-year growth rate of the net present value of future investments. It requires only one-year-ahead forecasts of earnings, and dividend payout policy...

Contrary to the recently reported US evidence of a negative premium, this study shows that China's economic policy uncertainty (EPU) commands a positive equity risk premium. Motivated by the observation that Chinese stock traders have a strong risk appetite and a cognitive bias, we modify the...

This paper is the first which studies extreme risk factor movements of Euro area sovereign bonds, whose prices are largely determined by risk factors representing interest rate risk, credit risk and market liquidity risk. Starting model independently from fundamental no-arbitrage relationships,...

This paper proposes a new approach to infer a firm-specific measure of the implied cost of capital. It incorporates endogenously estimated industry-year growth rate of the net present value of future investments. It requires only one-year-ahead forecasts of earnings, and dividend payout policy...

Market-wide, stock market specific, and real estate market specific risk – what kind of risk and to which extent drives the returns of listed real estate? Based on a structural asset pricing model calibrated to the empirical data in the U.S., we show that at least two thirds of the risk...

The value premium is the empirical observation that low market/book “value” stocks have higher returns than high market/book “growth” stocks. In this paper, we investigate and present evidence for an “equity as a call option hypothesis” for the value premium. Volatility decreases the...

Adding a size-premium to the CAPM is not an uncommon resort in small companies valuations. The objective of the premium is to price-in the small-size risk by increasing the required return on capital and thus reducing the company estimated price. Nevertheless, the use of a premium compromises...

This study analyses how liquidity risk affects bonds' yield spreads after controlling for credit risk, bond-specific characteristics and macroeconomic variables. Using two liquidity estimates, LOT liquidity and the bid-ask spread, we find that, in particular, the LOT liquidity measure has...