The structural uncertainty model with Bayesian learning, advanced by Weitzman (AER 2007), provides a framework for gauging the effect of structural uncertainty on asset prices and risk premiums. This paper provides an operational version of this approach that incorporates realistic priors about...

This article develops a family of stock valuation models that are based on book values and earnings. The modeling approach can be consistent with a large class of allowable dividend policies and does not require an explicit forecast of future book values. Reconciling empirical evidence, the...

This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index, and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the...

This article develops and empirically implements a stock valuation model. The model makes three assumptions: (i) dividend equals a fixed fraction of net earnings-per-share plus noise; (ii) the economy's pricing kernel is consistent with the Vasicek term structure of interest rates; and (iii) the...

This article studies the valuation of options written on the average level of a Markov process. The general properties of such options are examined. We propose a closed-form characterization in which the option payoff is contingent on cumulative catastrophe losses. In our framework, the loss...

We investigate whether the volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic volatility framework, we demonstrate a correspondence between the sign and magnitude of the...

From a credit risk perspective, little is known about the distress factors - economy-wide or firm-specific - that are important in explaining variations in defaultable coupon yields. This paper proposes and empirically tests a family of credit risk models. Empirically, we find that firm-specific...

How do risk-neutral return skews evolve over time and in the cross-section of individual stocks? We document the differential pricing of individual equity options versus the market index, and relate it to variations in the skew. The change-of-measure induced by marginal-utility tilting of the...

The fundamental valuation equation of Cox, Ingersoll and Ross was expressed in terms of the indirect utility of wealth function. As closed-form solution for the indirect utility is generallyunobtainable when investment opportunities are stochastic, existing contingent claims models involving...

This paper studies the equilibrium valuation of foreign exchange-contingent claims. The basic framework is the continuous-time counterpart of the classic Lucas (1982) two-country model, in which exchange rates, term structures of interest rates and, in particular, factor risk prices are all...