We investigate the implications of ambiguity aversion for retained earnings. We show that firms can eliminate distortions such as underinvestment by paying out earnings that maximizes shareholder wealth. We show that there is a negative relationship between ambiguity and retained earnings and...

This paper proposes a novel methodology to construct optimal portfolios that incorporates the occurrence of systemic events. Investors maximize a modified Sharpe ratio conditional on a systemic event. We solve the portfolio allocation problem analytically under the absence of short-selling...

We estimate the term structures of risk-neutral forward variance and skewness, and examine their predictive power for equity market excess returns and variance. We use Partial Least Squares to extract a single predictive factor from each term structure that is motivated by the theoretical...