This paper studies, both theoretically and empirically, the optimal executive compensation when firm performance is a noisy signal of executive’s hidden effort and the volatility of firm performance is stochastic. We build a tractable dynamic principal-agent model and show analytically that...

This paper examines whether financial statement information can predict future realized volatility incremental to the volatility implied by option market prices. Prior research establishes that option-implied volatility is a biased estimator of future realized volatility. I use an analytical...