I study the effects of risk and ambiguity (Knightian uncertainty) on optimal portfolios and equilibrium asset prices when investors receive information that is difficult to link to fundamentals. I show that the desire of investors to hedge ambiguity leads to portfolio inertia and excess...

I study the effects of aversion to risk and ambiguity (uncertainty in the sense of Knight (1921)) on the value of the market portfolio when investors receive public information that they find difficult to link to fundamentals and hence treat as ambiguous. I show that small changes in public...

The objective of this paper is twofold: (1) to analyze an optimal portfolio rebalancing by a fund manager in response to a “volatility shock” in one of the asset markets, under sufficiently realistic assumptions about the fund manager's performance criteria and portfolio restrictions; and...

Several analysts report explosive annualized Sharpe Ratios (ASRs) for investment portfolio performance evaluation of high frequency traders (HFTers) ranging from 4.3 to 5,000. This suggests that the profitability of HFT is much higher than that of other actively managed portfolios. In highly...

Option-implied volatility-managed risk factor models produce higher maximum squared Sharpe ratios than the recently proposed six-factor model, which is used as a benchmark model in this study. A model that incorporates option-implied volatility-managed risk factors based on dynamic scaling...

We formalize the idea that the financial sector can be a source of non-fundamental risk. Households' desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets...

I find that stocks with high sensitivities to changes in the VIX slope exhibit high returns on average. The price of VIX slope risk is approximately 2.5% annually, statistically significant and cannot be explained by other common factors, such as the market excess return, size, book-to-market,...

I generalize the long-run risks (LRR) model of Bansal and Yaron (2004) by incorporating recursive smooth ambiguity aversion preferences from Klibanoff et al. (2005, 2009) and time-varying ambiguity. Relative to the Bansal-Yaron model, the generalized LRR model is as tractable but more flexible...

Volatility models of the market portfolio's return are central to financial risk management. Within an equilibrium framework, we introduce an implementation method and study two families of such models. One is deterministic volatility, represented by current popular models. Another is in the...