This paper develops a simple model of the gap between socially and privately optimal bank lending when a bank has an overhang of impaired loans, and analyzes government policies designed to close this gap. The impaired loans have risky cash flows but observable market values. A number of basic...

The Arbitrage Pricing Theory (APT) of Ross (1976, 1977), and extensions of that theory, constitute an important branch of asset pricing theory and one of the primary alternatives to the Capital Asset Pricing Model (CAPM). In this chapter we survey the theoretical underpinnings, econometric...

Investors are natural risk bearers, in part due to the vast array of risk management tools available to them. These tools allow a risk budgeting process that de-couples the asset allocation and active bets taken in the portfolio. The risk of non-traded assets in the portfolio can be reduced by...

Exchange rate regimes have evolved a lot of the years, specifically the past century, right from the Gold standard to the Bretton Woods era that led to the creation of the International Monetary Fund (IMF) and Post Bretton Woods periods that have seen the emergence of currency unions and a whole...

This paper considers two methods of estimating factor mimicking portfolios from asset returns: Two-pass cross-sectional regression and asymptotic principal components. We show that, for a balanced panel of assets, iterating the two-pass cross-sectional regression converges to the same estimated...

We suggest a technique for estimating pervasive economic factors which allows the use of all available security return data. The resulting factor estimates can be used in applications and tests of the Arbitrage Pricing Theory (APT). An obvious advantage of the technique is that more precise...

This paper develops a dynamic approximate factor model in which returns are time-series heteroskedastic. The heteroskedasticity has three components: a factor-related component, a common asset-specific component, and a purely asset-specific component. We develop a new multivariate GARCH model...

We evaluate the performance of various methods for estimating factor returns in an approximate factor model. Differences across estimators are most pronounced when there is cross-sectional heteroskedasticity, or when cross-sectional sample sizes, n, are below 4,000 assets. Estimators...

An important issue in applications of multifactor models of asset returns is the appropriate number of factors. Most extant tests for the number of factors are valid only for strict factor models, in which diversifiable returns are uncorrelated across assets. In this paper we develop a test...

This paper develops a new estimation procedure for characteristic-based factor models of security returns. We treat the factor model as a weighted additive nonparametric regression model, with the factor returns serving as time-varying weights, and a set of univariate non-parametric functions...