We propose a novel high-frequency decomposition of daily stock returns into news- and non-news-driven components, and uncover evidence of pervasive stock market underreaction to firm news. Prices tend to drift in the same direction as the initial market response for several days after the news...

Stock return volatility significantly predicts active leverage adjustment, consistent with the trade-off theory. Firms respond asymmetrically to rising volatility instead of falling volatility, more with debt reduction than equity issuance. The forecasting power of stock return volatility mostly...

We formulate a stylized model that admits volatility ambiguity to the Lucas framework. The model specifies an economically motivated ambiguity penalty function that makes volatility ambiguity quantifiable with χ2-statistics, and allows for analytical solutions. The addition of volatility...