We show that a simple equilibrium model with uncertain growth is able to simultaneously generate patterns in implied volatility and risk aversion that are similar to the ones observed in the data. In addition, the model produces an implied pricing kernel that is increasing for particular levels...

We show in a theoretical model that the expected excess return on any asset depends on its covariance not only with the market portfolio, but also with changes in the representative agent's estimate. We test our model using GMM and compare it to the CAPM. The results suggest that adding an...

This paper investigates the extent to which differences in information costs can explain the equity home bias puzzle. In a model where information costs are higher for the Foreign asset than for the Home asset, we show that - if cost functions are convex and the assets have identical return...

Three types of agents acting on different information sets are considered: fully informed agents, insiders, and outsiders. Differences in information quality are shown to affect the properties of their optimal portfolios. For an outsider, the share of wealth invested in the stock is decreasing...

During good economic times, the likelihood of obtaining a loan from a foreign bank increases in the borrower firm's opacity. During bad economic times (recessions), this relation reverses as the probability of obtaining a foreign loan decreases for all firms, but drops disproportionately for...

In contrast to the efficient-market hypothesis (EMH), the noisy-market hypothesis (NMH) asserts that prices are but noisy indications of fundamental values. We study losses in certainty equivalents of investing according to one hypothesis (NMH or EMH) when the other is true. Our findings suggest...

We analyze the heterogeneity of foreign bank loans in a newly constructed global dataset that explicitly distinguishes in a disaggregated loan-bank-firm setting between domestic loans and three categories of foreign loans: loans by subsidiaries of foreign banks, loans by foreign bank branches,...

A simple portfolio choice model shows that, when a bank's capital is constrained by regulation, regulatory cost (risk weightings) alters the risk and value calculations for the bank's assets. In particular, we find that banks may respond to stricter regulation by increasing the share of...

This paper analyzes the expected life-time utility and the hedging demands in a Lucas (1978) economy, in which the dividend drift term is unknown and mean-reverting. An expression for the individual investor’s expected life-time utility in equilibrium is derived, and his hedging demand is...