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Exposures of expected future nominal depreciation rates to the current interest rate differential violate the UIP hypothesis in a pattern that is a nonmonotonic function of horizon. Forward expected nominal depreciation rates are monotonic. We explain the two patterns by simultaneously incorporating the weak form of PPP into a joint model of the stochastic discount factor, the nominal exchange rate, and domestic and foreign yield curves. Departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern. Thus, the variance of the stochastic discount factor is related to the real exchange rate. [ABSTRACT FROM AUTHOR]

A large number of studies have failed to identify a robust and economically significant climate risk premium or climate beta, either at the aggregate or at the sectoral level. The author examines several explanations of why this may be the case and finds that a mispricing of climate risk is the most likely explanation. If this is true, price adjustments will eventually occur, either in a gradual or in an abrupt way. This is a novel source of risk that should be on the radar screen of long-term investors. [ABSTRACT FROM AUTHOR]

Economic benefits and risk premiums significantly affect the production system decision making of farmers and government departments. This study evaluated the economic feasibility and estimated the risk premium of 12 rainfed soybean production systems with various planting densities, fertilization rates and planting patterns by considering the impact of soybean price fluctuation. There were two planting densities (D1: 160,000 plants ha−1 and D2: 320,000 plants ha−1), two fertilization rates (F1: 20 kg ha−1 N, 30 kg ha−1 P, 30 kg ha−1 K; F2: 40 kg ha−1 N, 60 kg ha−1 P, 60 kg ha−1 K) and three planting patterns (F+W0: flat cultivation with no irrigation; R+W0: plastic-mulched ridge-furrow cultivation (PMRF) with no irrigation; R+W1: PMRF with supplemental irrigation of 30 mm at the pod-filling stage). Based on the two-year (2019–2020) field data in a semi-humid drought-prone region of northwest China and soybean price fluctuation from January 2014 to June 2021, the net income (NI) was calculated by considering the impact of soybean price fluctuation and assuming constant soybean production costs. The net present value (NPV) method and the stochastic efficiency with respect to a function (SERF) method were used to evaluate the profitability of protective alternatives and the risk of these alternatives. The results showed that the 12 proposed soybean production systems were economically feasible. Reducing the fertilization rate reduced the input costs, but it did not necessarily result in a decrease in soybean yield and NI. The payback period of all production systems was within two years for farmers investing through loans. High-fertilizer and high-density production systems made personal investment obtain the highest economic benefit in this study, which was not the best investment strategy from the perspective of production-to-investment ratio and environmental protection departments. The preferences of farmers with various risk aversion and environmental protection departments in terms of risk premium were also proposed. The economic and risk assessment framework of this study can enhance the understanding of the adjustment of production systems from different perspectives, and provide strategies for promoting the protection of economic, environmental and socially sustainable agricultural systems. [ABSTRACT FROM AUTHOR]

Conservation tillage systems have been promoted by governments in many regions of the world as an effective strategy to reduce soil and water losses caused by conventional farming practices. Considering adoption of the conservation tillage system, in addition to the uncertainty in economic aspects, the attitude of farmers is also important. To assess the risk efficiency of five tillage alternatives (Low-tillage, No-tillage, Conventional tillage, and two Rotational-tillage systems), we used Stochastic Efficiency with Respect to a Function approach for the typical wheat-corn production system in Marvdasht, Bakhtegan Basin, Iran, using four-year (2010-2014) field data set. Riskneutral farmers' preferred the conventional tillage method over conservation tillage methods, relying on the higher net return of the wheat-corn rotation. However, at the higher risk-aversion degrees, the ranking of conventional tillage tended to decline rapidly and the two rotational tillage systems were preferred over other alternatives. The comparison of certainty equivalents of conservation tillage treatments indicated the superiority of low-tillage over no-tillage at all levels of risk aversion. The results of risk premium estimation in this study revealed that providing subsidy resources is not enough to promote the adoption of conservation tillage practices, and it is necessary to support risk-averse farmers by enhancing their knowledge about the risk-efficient options. [ABSTRACT FROM AUTHOR]

The equity variance risk premium is the expected compensation earned for selling variance risk in equity markets. The variance risk premium is positive and shows only moderate persistence. High variance risk premiums coincide with the left tail of the consumption growth distribution shifting down. These facts, together with risk-neutral skewness being substantially more negative than physical return skewness, refute the bulk of the extant consumption-based asset pricing models. We introduce a tractable habit model that does fit the data. In the model, the variance risk premium depends positively (or negatively) on "bad" (or "good") consumption growth uncertainty. [ABSTRACT FROM AUTHOR]

We develop and empirically validate dynamic approaches of implied cost of equity capital (ICC), facilitating the estimation of firms' expected cost of equity capital at any required estimation date. Using on average 246,090 monthly observations, we empirically validate conflicting approaches for dynamic ICC estimation by analyzing the inferred market risk premia and assessing correlations with common risk factors. While the adjustments suggested by Daske et al. (2006) yield important and systematic deviations in the course of the year, the dynamic residual income model of Kempkes and Wömpener (2019) is robust to the choice of the estimation period. [ABSTRACT FROM AUTHOR]

The consequences of costly information acquisition for sovereign risk are explored in a quantitative sovereign default model. We identify information costs empirically using Bloomberg news‐heat data. The calibrated model microfounds heteroskedasticity in the country risk spread as measured by a novel metric we call the Crisis Volatility Ratio (CVR). Crises are endogenously more volatile because more information is acquired and priced. Recalibrated extant models do not generate CVRs in the empirical range, but ours does. Because effective risk tolerance depends on the information set, the model also suggests that risk premia fall with information costs. [ABSTRACT FROM AUTHOR]

We develop a new statistical constraint to improve the stock return forecasting performance of predictive models. This constraint uses a new objective function that combines the Huber loss function with the Ridge penalty. Out-ofsample results indicate that our constraint improves the predictive ability of the univariate models. The constrained univariate models significantly outperform the historical average benchmark model assuming no predictability. The forecast improvement based on the new constraint is also evident for multivariate information methods including forecast combination and diffusion index. The model is capable of capturing time-varying risk which serves as the potential economic explanation of the improved return predictability. Our results are robust to different evaluation subsamples, validation sample lengths, and different risk aversion coefficients. [ABSTRACT FROM AUTHOR]

This paper reports our findings on the return dynamics of Bitcoin and Ethereum using high-frequency data (minute-by-minute observations) from 2015 to 2022 for Bitcoin and from 2016 to 2022 for Ethereum. The main objective of modeling these two series was to obtain a dynamic estimation of risk premium with the intention of characterizing its behavior. To this end, we estimated the Generalized Autoregressive Conditional Heteroskedasticity in Mean with Normal-Inverse Gaussian distribution (GARCH-M-NIG) model for the residuals. We also estimated the other parameters of the model and discussed their evolution over time, including the skewness and kurtosis of the Normal-Inverse Gaussian distribution. Similarly, we determined the parameters that define the evolution of the estimated variance, i.e., the parameters related to the fitted past variance, square error and long-term average value. We found that, despite the market uncertainty during the COVID-19 emergency period (2020 and 2021), the selected cryptocurrencies' return volatility and kurtosis were even greater for several other subperiods within our sample's time frame. Our model represents an analytical tool that estimates the risk premium that should be delivered by Bitcoin and Ethereum and is therefore of interest to risk managers, traders and investors. [ABSTRACT FROM AUTHOR]

We present empirical evidence showing that option-implied risk measures (OIRMs) are substantially impacted by bid–ask spreads in underlying options. Asking prices are more sensitive to shocks than bids, leading to highly skewed distributions of spreads. We derive and estimate a model of market making that empirically matches these asymmetric responses as well as the time-series properties of bid–ask spreads. Using these estimates to obtain bias-corrected option quotes, we compute several popular OIRMs. We find that fear and risk premia associated with market events that affect the center of the return distribution or unpredictable return jumps are on average overstated when relying on option mid-quotes, whereas risk associated with return-tail events is larger once the bias has been corrected. [ABSTRACT FROM AUTHOR]

Risk premia are difficult to identify in nonstorable commodities such as electricity. In this article, we propose a modified Fama–French regression framework and show that when the spot prices do not follow a martingale—a common assumption in the electricity market—model specifications play an important role in detecting time-varying risk premia in the futures market. With this insight, we propose a multi-factor model that captures important dynamics in electricity prices and an estimation method based on particle Markov chain Monte Carlo to separate risk factors in energy prices. Using spot and futures data in the Germany/Austria electricity market, we demonstrate that our proposed model surpasses alternative models that ignore some of risk factors in forecasting spot prices and in detecting time-varying risk premia. Based on our proposed model, we separately identify risk premia carried by individual risk factors and document large variations in the premia of each factor. [ABSTRACT FROM AUTHOR]

This paper examines how changes in risk disclosures affect uncertainty about risk. We measure changes in risk disclosures using the addition and removal of individual risk factors to firms' 10-K filings, identified via textual analysis of the risk factors section. Our market outcome is the variance risk premium (VRP), which captures the market's pricing of uncertainty about firm risk. Following recent theoretical predictions, we predict and empirically document that newly disclosed signals of risk factor exposure—reflected in added and removed individual risk factors—decrease the uncertainty surrounding firm risk, as proxied via the VRP. We further confirm that individual risk factors offer incremental insights compared with alternative textual risk measures. Collectively, our findings suggest that textually evaluating individual risk factors reveals information about the uncertainty regarding firm risk. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G18; G32; M40. [ABSTRACT FROM AUTHOR]

As of January 2016, the Solvency II Directive demands that all insurance companies in the EU perform a Solvency Capital Requirement (SCR) calculation. We propose an earthquake catastrophe model that calculates the SCR using an innovative hazard module. We test our model in the Attica region, which hosts 41.6% of the insured buildings in Greece. The results show a risk premium of 1.63% up to 3.16% for residential buildings, depending on exposure and deductible policy. A comparison between the EIOPA's Standard Formula (SF) and our model shows that the SF overestimates the SCR by 19.3% in the Attica region. The addition of the 2% deductible to the exposure policies results in a 56.8% lower SCR than when using the SF. The overestimation varies from 2.7% to 133.57% in seven out of 10 catastrophe risk evaluation and standardising target accumulations zones, and by 16.28–32.97% in the three remaining zones. [ABSTRACT FROM AUTHOR]

The study explains the export behavior of Egyptian firms under demand volatility in destination countries using detailed customs data and high-dimensional fixed effects. It finds that demand volatility negatively affects both the intensive and extensive export margins. The effects are particularly evident for large firms which reduce their export sales — especially over time — to more volatile destinations/products, are more likely to exit from exporting more volatile products and are less (more) likely to enter (exit) more volatile destinations. These findings confirm recent literature that emphasizes the greater elasticity of large firms to foreign demand shocks. They are also in line with risk aversion models in which the average risk premium increases with firm size. Given the disproportionate adverse impacts on large exporters, we find that higher demand volatility leads to lower aggregate exports, especially to geographically close and low trade costs countries. Accordingly, uncertainty in demand lessens the positive effect of lower trade barriers on exports. [ABSTRACT FROM AUTHOR]

Investors infer ambiguity from text in news and social media. A proxy for information ambiguity is developed from text processing and used in regression tests against the S&P 500 returns. A risk-neutral agent model with uniform prior beliefs is developed to explain the ambiguity premium or discount under unfavorable or favorable market conditions agnostic of the ambiguity preferences. The model postulates that the ambiguity premium is often elusive in efficient markets due to returns unpredictability, and the information ambiguity as an omitted variable bias in the fundamental relationship between risks and returns. Empirically, the author finds that news media drives equity prices more than social media except from June 2009 to November 2016. [ABSTRACT FROM AUTHOR]

We investigate whether and how managerial risk aversion influences the structuring of the generalist pay premium. We use three candidate variables for managerial risk aversion: the CEO's equity portfolio vega, decision horizon, and wealth. We find that equity‐based pay differs between generalist CEOs (who have broader experience spanning several industries) and non‐generalist CEOs (who tend to have narrower, specialized industry‐specific experience) based on their risk appetite. Further, how the generalist pay premium is structured depends on the risk aversion measure. Because generalist CEOs tend to be better paid than their counterparts, understanding their risk aversion level will help companies improve the structure of these CEOs' compensation packages, and ultimately those of all CEOs. When vega is the risk aversion measure, CEOs get compensated for bearing risk. However, generalist CEOs with high vegas suffer a "risk discount" in their compensation. These generalist CEOs are associated with lower cash, equity, and total pay. CEOs with longer decision horizons get more equity and less cash, but this structuring does not extend to the generalist CEOs. Finally, wealthier CEOs get more cash and total pay. However, generalist CEOs who are wealthier get less cash pay. [ABSTRACT FROM AUTHOR]

In environments with impending regime shifts, previous research studies probability judgments of decision makers (DMs) regarding a regime shift and finds evidence for the system neglect hypothesis: In unstable environments with precise signals, DMs exhibit relatively more underreaction in their probability judgments, and in stable environments with noisy signals, they exhibit relatively more overreaction. In the present paper we focus on pricing decisions and study how risk attitudes, as well as probability judgments regarding a regime shift, affect these decisions. We develop a model that integrates prospect theory with the system neglect hypothesis and compare changes in empirical pricing decisions to those of a Bayesian risk-neutral agent. We find a pattern of under- and overreaction in pricing decisions that mimics the system neglect hypothesis in probability judgments only when the DM's prior probability of a regime shift is low; the system neglect pattern vanishes when the DM's prior probability of a regime shift is high. We argue that in the case of low priors, changes in risk attitude in reaction to signals indicative of a regime shift amplify system neglect in probability judgments. In the case of high priors, on the other hand, changes in risk attitude dampen the effect of system neglect. We test our model predictions in experimental insurance markets and offer various extensions to check for the robustness of our findings. Finally, we discuss implications for managerial practice in organizational contexts that are characterized by continuous change. This paper was accepted by Yuval Rottenstreich, behavioral economics and decision analysis. Funding: This work was funded by Fundação para a Ciência e a Tecnologia (UIDB/00124/2020, UIDP/00124/2020 and Social Sciences DataLab - PINFRA/22209/2016), POR Lisboa and POR Norte (Social Sciences DataLab, PINFRA/22209/2016). Furthermore, it was supported by the Ministerio de Ciencia e Innovación España [10.13039/501100011033, Grants ECO2014-52925-P, PID2019-111512RB-I00-HMDM, and HDL-HS-280218]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4661. [ABSTRACT FROM AUTHOR]

The response of corporate bond credit spreads to three exogenous macro shocks—oil supply, investment‐specific technology, and government spending—is large, significant, and a mirror image of macroeconomic activity. This countercyclicality is driven largely by credit risk premia and translates into significant return predictability. Equity risk premia exhibit similar responses, providing external validity. Information rigidities and leverage play a key role in the transmission of the shocks. Since causal evidence linking macro shocks to credit markets is scarce and recent work highlights the real effects of credit fluctuations, our findings contribute to understanding the joint dynamics of credit markets and the macroeconomy. [ABSTRACT FROM AUTHOR]

Correlation in cyber risk represents an additional source of concern for utility and industrial infrastructures, where risks may be introduced by connected systems. A major means of reducing risk is to transfer it through insurance. In this paper, we consider a company which has peripheral branches in addition to its headquarters, where risk correlation is present between all of its sites and insurance is adopted to hedge against economic losses. We employ the expected utility principle (which leads to the well-known mean variance premium formula) to derive the insurance premium under risk correlation under several risk scenarios. Under a first-order approximation, a quasi-linear relationship between the premium and the two major risk factors (the number of branches and the risk correlation coefficient) is determined. [ABSTRACT FROM AUTHOR]

This paper explores the predictions of real business cycle theory on the roles of total factor productivity (TFP) and financial frictions to explain business cycles in emerging market economies (EMEs). I obtain evidence about TFP, price of capital, risk premium, and collateral constraint shocks by estimating structural vector autoregressions (SVARs) on a Brazilian sample from 1999Q1 to 2018Q4 and a Mexican sample from 1997Q1 to 2018Q4. On each sample, two SVARs are estimated. One SVAR identifies shocks by imposing restrictions on their short-run impact. The other SVAR is grounded on restrictions that shocks have long-run effects on business cycles in EMEs. Estimates of the SVARs show the TFP shock is the main driver of business cycle movements in Brazil and Mexico. However, this evidence is produced by the SVAR under the long-run restrictions, which indicates the identification of shocks matters to the explanation of business cycles in EMEs. Next, the Brazilian and Mexican business cycles are markedly different, as the contributions of shocks to aggregate fluctuations vary across the two countries. Hence, findings of this paper suggest although not all business cycles are alike in EMEs, "the cycle is the trend" view on aggregate fluctuations in EMEs remains valid. The empirical results of this paper are in support of the economic policies that aim to robustify the productivity process of EMEs. [ABSTRACT FROM AUTHOR]

We propose a methodology to use functional factors in empirical asset pricing models. We establish conditions under which it is possible to recover linear beta pricing. The proposed estimation approach allows us to use high-dimensional functional curves, such as the term structure of interest rates or the implied volatility smile, as factors. This framework enables the estimation of functional factor loadings as well as risk premium parameters of factor models. We derive estimation algorithms and establish the asymptotic consistency and normality of the parameter estimates. In an empirical application, we show that the implied variance smile of the S&P500 is a potential pricing factor for momentum-sorted portfolios. In particular, a positive risk premium is earned by the convexity of the implied variance curve. [ABSTRACT FROM AUTHOR]

In this paper, we analyze the relationship among skewness, value, and stock returns for US financial intermediaries. Further, we compare skewness based on past returns to risk-neutral skewness based on options. We find that the option-implied skewness has a significantly higher explanatory power. In line with the strand of literature on investors exploiting mispriced stocks through option trading, we find that a higher ex ante skewness indicates a low valuation that predicts higher returns. We investigate the relationship between skewness and value for each segment of intermediaries, and we show that the link is strongest for financial technology firms. [ABSTRACT FROM AUTHOR]

We examine short term trades in the housing market over the period 2000–2013 using nationally representative data across multiple U.S. housing markets. Such trades, often characterized as "house flipping", have gained currency in recent years with reality television shows depicting success and failure. We find evidence of returns in excess of market house price index growth (which we call alpha) during certain time periods with results that also vary across distressed versus non-distressed acquisition strategies. [ABSTRACT FROM AUTHOR]

Under rational asset pricing theory, and in efficient, frictionless market, risk should be priced contemporaneously and, thus, the market meltdown during the COVID‐19 pandemic must have been a contingent valuation of newly created risk. In contrast, we find that the reduction in equity value during the pandemic was stronger for stocks with higher pre‐pandemic accrued risk. This lends support to the discrete pricing proposition, which is a form of behavioural bias where investors price accrued risk during significant corporate or macroeconomic events. Furthermore, we compare the pricing of accrued risk during the pandemic with the pricing of accrued risk during non‐pandemic events and during past financial crises. We report evidence that pricing of accrued risk results in a premium in normal times and a discount during financial turmoil. Finally, we report evidence that investors price accrued stocks discriminately, that is, they are more likely to price accrued risk of stocks of larger firms, smaller B/M, and weaker momentum. Several theoretical and practical implications are discussed inside the paper. [ABSTRACT FROM AUTHOR]

Forecasting equity risk premium is notoriously difficult due to a mass of data noise in the raw series and the absence of clear tendency. Using the monthly S&P 500 excess returns from 1927:01 to 2018:12, we first de‐noise the in‐sample original returns series via wavelet method to capture the basic trend of equity risk premium, and then propose forecasting models to obtain one‐step forward out‐of‐sample predicted values based on the de‐noised returns. Our new models can provide substantially superior out‐of‐sample performance compared with other competing models and the historical average. Sizeable economic gains can be realized by a mean–variance investor if they allocate their asset through the new approach. Our findings are robust under different settings from both statistical and economic perspectives. [ABSTRACT FROM AUTHOR]

Alternative risk premium (ARP) comprises a wide range of rules-based trading strategies spanning all major asset classes. Its unique nature creates ongoing benchmark challenges, in terms of approach and data availability. We focus on two strategies—cross-sectional value for US stocks and equity time-series trend—highlighting the difficulties in assessing the performance of ARP fund managers. At the heart of the matter is specification noise—potentially material performance dispersion among equally defensible benchmark methodologies. The dearth of lengthy return series is an exacerbating factor. We address practical consequences of the absence of de facto benchmarks, highlight the data void yet to be filled, and propose a framework for approaching performance evaluation of ARP-fund managers that distinguishes expectation, surprise, style, implementation and allocation contributions. [ABSTRACT FROM AUTHOR]

This paper studies a long butterfly strategy (which is immune to parallel curve shifts but exposed to non-parallel curve shifts) on the South African interest rate swap curve. Ten swap butterfly risk factors are identified using monthly South African swap data from 2001–2022. The top ranked butterfly strategies displayed strong and persistent outperformance over the bottom ranked strategies for each factor, resulting in improved risk-adjusted and absolute returns especially during positive and steep twists, and bull and bear flattening curve scenarios. Trade costs can be significant, so having a pragmatic rebalancing strategy with efficient market makers that limit trade costs to 1bps of spread make these swap butterfly risk factors an effective and successful portable alpha strategy. [ABSTRACT FROM AUTHOR]

This paper analyses the auction policy over enrollees' monopoly rights introduced in the Chilean pension system. This policy was designed to promote competition in the pension fund market driven by private firms, after 30 years of operation. Since the Chilean pension fund system has inspired dozens of countries in the last forty years, the analysis of the design and performance of its relatively new auction mechanism is of worldwide interest. We present a theoretical and empirical model. Our theoretical model illustrates firms' incentives to participate in the auction process. Our empirical analysis focuses on the effect of auctions on outcomes, such as fees, mark-ups, demand price elasticity, returns, and risk premiums. Despite the evidence shown for the positive benefits of the auction implementation, the current mechanism design is not considering that the biggest issue is the low individuals' price response levels. Importantly, the current auction design only incentivizes new entrants to participate. Thus, the design generates low competition in the auction processes. Proper design should incentivize all firms to participate. Besides, we find that consumers' price elasticity increased after the implementation of auctions, although demand is still generally inelastic. Interestingly, non-winning auction firms did not react in fees but may have reacted in other characteristics, such as returns and risk premiums. [ABSTRACT FROM AUTHOR]

We learn from data that volatility is mostly path-dependent: up to 90% of the variance of the implied volatility of equity indexes is explained endogenously by past index returns, and up to 65% for (noisy estimates of) future daily realized volatility. The path-dependency that we uncover is remarkably simple: a linear combination of a weighted sum of past daily returns and the square root of a weighted sum of past daily squared returns with different time-shifted power-law weights capturing both short and long memory. This simple model, which is homogeneous in volatility, is shown to consistently outperform existing models across equity indexes and train/test sets for both implied and realized volatility. It suggests a simple continuous-time path-dependent volatility (PDV) model that may be fed historical or risk-neutral parameters. The weights can be approximated by superpositions of exponential kernels to produce Markovian models. In particular, we propose a 4-factor Markovian PDV model which captures all the important stylized facts of volatility, produces very realistic price and (rough-like) volatility paths, and jointly fits SPX and VIX smiles remarkably well. We thus show that a continuous-time Markovian parametric stochastic volatility (actually, PDV) model can practically solve the joint SPX/VIX smile calibration problem. This article is dedicated to the memory of Peter Carr whose works on volatility modeling have been so inspiring to us. [ABSTRACT FROM AUTHOR]

This study investigates hidden factors in the volatility index (VIX) futures market. Risk factors spanned by the futures curve have a limited ability to capture variations in the expected excess returns. The market's hidden factors provide additional predictive power for future returns in addition to that provided by the factors spanned by the futures curve. The use of a dynamic term structure model with these hidden factors indicates that the hidden factors as a proxy for macro risks materially impact the VIX futures returns and their yield term structure and are significantly helpful in depicting the dynamics of the risk premia. [ABSTRACT FROM AUTHOR]

This study comprehensively analyzes the optimal hurdle rate, or the Minimum Attractive Rate of Return (MARR), for oil and gas investments in Indonesia's National Oil Company. By incorporating country-specific, industry, and project risk into the calculation of the Weighted Average Cost of Capital (WACC), the study outlines a risk-adjusted methodology to guide investment decisions. The Analytic Network Process (ANP) method and Monte Carlo Simulation employ the lognormal distribution to quantify and analyze risk variables, establishing a project-specific risk premium. The significance of the country risk premium is emphasized, highlighting its role in investment diversification, accurate valuations, strategic decision-making, and effective risk management. The calculated hurdle rate ranges from 10,91% to 15,42%. The study underscores the importance of thorough risk analysis in ensuring sound investment decisions in the global oil and gas industry. It concludes by emphasizing the risks of setting too low a hurdle rate, leading to excessive risk-taking, or too high a hurdle rate, which might preclude potentially profitable investments. [ABSTRACT FROM AUTHOR]

Energy performance contracting is a contractual arrangement between clients and energy service companies. At present, it is a key tool to implement energy efficiency measures in the existing supply chain management. In this paper, we study the efficiency of the energy performance contracting in a supply chain including one risk‐averse supplier and two risk‐neutral manufacturers with financial asymmetry. The manufacturer with weak finance has no funds to order enough raw materials; thus, the supplier offers a trade credit financing to ensure her normal operation and participate in the competition with the financially strong manufacturer in the market. However, neither manufacturer has extra capitals to develop emission reduction activities. Therefore, the upstream supplier acts as an energy service company and provides an energy performance contracting for two downstream manufacturers to reduce carbon taxes. We analyze important factors such as risk aversion coefficient, carbon tax saving sharing ratio, and variable cost coefficient to explore whether and which manufacturer the supplier should select to provide an energy performance contracting. The results show that, when the risk aversion is high, the supplier will not provide energy‐saving services for any manufacturer. When the risk aversion and the variable cost are low, the supplier tends to offer an energy performance contracting for the manufacturer with weak finance, because the supplier can get more utility from higher wholesale price. However, with the increase of costs, the supplier with a low risk aversion is more willing to provide emission reduction services for the financially strong manufacturer. Furthermore, sensitivity analysis demonstrates that there is always a Pareto region to optimize the utility of supplier and manufacturers, when the supplier provides energy performance contracting for both manufacturers. [ABSTRACT FROM AUTHOR]

This paper investigates the effect of macroeconomic expectations on the value premium. We introduce a two‐pass estimation procedure to extrapolate the impact of investors' macroexpectations on the firm fundamental value of Rhodes‐Kropf, Robinson, and Viswanathan. We find that the level and slope of the term structure affect valuation, revealing a heavily industry‐dependent effect. The portfolios sorted on metrics orthogonal to macroeconomic variables show a clear association between the misvaluation component of value premium and size risk. By removing the influence of the macroeconomic conditions and size, we separate the portion of the value premium that rewards macroeconomic expectations. [ABSTRACT FROM AUTHOR]

This paper studies variance risk premiums in the credit market using a novel data set of swaptions quotes on the CDX North America Investment Grade and High‐Yield indices. The returns of credit variance swaps are negative and economically large, irrespective of the credit rating class. They are robust to transaction costs and cannot be explained by established risk factors and structural model variables. We also dissect the overall variance risk premium into receiver and payer variance risk premiums. We show that credit variance risk premiums are mainly driven by the payer corridor, which is associated with worsening macroeconomic conditions. [ABSTRACT FROM AUTHOR]

The term structure of equity risk premium is moderately downward-sloping unconditionally, markedly downward-sloping in good times, and markedly upward-sloping in bad times. An asset-pricing model featuring time-varying correlation between realized and expected cashflow shocks explains these puzzling empirical findings. Indeed, the model-implied slope of the equity term structure is in line with the data, both conditionally and unconditionally, because the estimated cashflow shock correlation is volatile, counter-cyclical, and negative on average. The model also generates realistic asset-pricing moments and a positive relation between the equity risk premium, slope of the equity term structure, and the dividend yield. This paper was accepted by David Sraer, finance. Funding: The authors thank the University of Texas at Dallas and the University of Toronto for financial support. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4565. [ABSTRACT FROM AUTHOR]

Our study investigates the consequences of the 2019 Australian bushfire regarding its financial, economic, and environmental effects. Using an augmented version of the event study methodology, we show that depressed investors' mood leads to a countrywide financial impact, which tends to be long-lasting. On the other hand, regional effects are self-correcting, bringing financial valuations back to their fundamental values. We observe that polluting firms experience an increase in their stock market returns during bushfire seasons– consistent with the theory of increased risk premiums in times of uncertainty. Regarding economic activity, we confirm that the countrywide tourism sector, which employs a significant fraction of Australia's labor force, continues to be severely impaired by regional fires. Unlike previous studies in finance, we demonstrate that bushfires have a substantial and harmful impact on Australia's air quality. The battery of robustness tests (range of event windows, controlling for information leakage, and changing macroeconomic conditions) validates our findings. [ABSTRACT FROM AUTHOR]

The book-to-market ratio's numerator adds assets and liabilities differing in risk. We propose a test for the value premium and its sources. Individual balance sheet holdings are divided by firm size. When associated risk premium coefficients are equal, an overall book-to-market is appropriate. Otherwise, there are different risks in assets and liabilities. For U.S. firms, for four decades since 1980, the excess return is regressed on seven ratios relative to size for cash, receivables, tangibles, intangibles, payables, short and long-term debt, and controls. The seven value premiums are not equal. Firms earn higher returns for cash and receivables and lower for short-term debt. Tangible and intangible assets earn no value premium. [ABSTRACT FROM AUTHOR]

Auditing standards instruct external auditors to read public information to mitigate management's information advantage in hiding earnings management and fraud. The transparency of this information, and thus the cost of becoming informed using public information, varies across firms. We argue this cost of becoming informed creates an opportunity for earnings management, increasing audit risk. This study finds that higher costs of becoming informed are related to higher audit fees. In addition, we show that executive equity risk-taking incentives and an attitude towards aggressive reporting exacerbate the effect of the cost of becoming informed on audit fees, suggesting complementary effects of these fraud dimensions on audit pricing. These results are more likely due to audit firms charging risk premiums rather than doing additional audit work. This paper contributes to recent research on the costs of becoming informed and to research on the relation between management compensation and auditor compensation. [ABSTRACT FROM AUTHOR]

Summary: This paper presents a macro‐finance model of the US economy and the spot and futures markets for oil. The performance of the model is greatly enhanced by using the Kalman filter to model latent variables representing the inflation asymptote, the real price of oil and the slope of the futures curve. We find that these are dominated by innovations in observed futures prices, reflecting the importance of market expectations. Using the Kalman filter to capture inflationary shocks helps solve the notorious price puzzle, the tendency for increases in interest rates to anticipate such developments and apparently cause inflation. Futures prices also depend upon risk premiums, which we find are dominated by the latent variable representing the real oil price rather than macro variables like inflation and interest rates. [ABSTRACT FROM AUTHOR]

Treasury securities enjoy a "money premium" because they are ultra‐safe and liquid. However, during debt limit impasses, the safety and liquidity of Treasury securities temporarily deteriorate, eroding the money premium. Using past impasses, we find the money premium eroded by roughly six basis points across all Treasury securities and up to 50 basis points for the shortest maturities at the greatest risk of a delayed principal payment. Safety and liquidity each accounted for about half of the erosion. The deterioration of safety and liquidity also appears to interact, consistent with theories of default‐driven liquidity risk and the information sensitivity of debt. [ABSTRACT FROM AUTHOR]

The existence of a negative variance risk premium on agricultural futures contracts suggests that market participants pay to hedge unexpected increases in the volatility of these contracts. In this paper, we decompose the variance risk premium in corn and soybeans markets into jump and diffusive components using options and futures data from 2009 to 2021. We find that market participants on average only pay to hedge unexpected increases in jump volatility but not those in diffusive volatility. Furthermore, growing season uncertainty and the arrival of United States Department of Agriculture (USDA) announcements play important roles in driving the market's fear of unexpectedly large price jumps. [ABSTRACT FROM AUTHOR]

Financial markets are expected to predict macroeconomic conditions as movement in the former depends upon expectations of future performance for the latter. However, existing evidence is mixed. We argue that this arises because the stock return and term structure series typically used in studies, fail to sufficiently capture investor risk preferences. For US data, we use the variance risk premium (VRP) and default yield (DFY) to better capture such a risk measure and demonstrate that these variables exhibit greater evidence of predictive power for key macroeconomic series. In addition to VRP and DFY, we include further variables that may also capture market risk. Given similar dynamics between different risk measures and the potential for multicollinearity in estimation, we consider variable combinations. Using results obtained through predictive regressions, out‐of‐sample forecasting and a probit model designed to capture periods of expansion and contraction, we show that these combination variables can predict future movements in macroeconomic conditions as well as results using individual variables. Of key interest, combinations that include the VRP and DFY are preferred across all macro‐series. [ABSTRACT FROM AUTHOR]

Emissions abatement alone cannot address the consequences of global warming for weather disasters. We model how society adapts to manage disaster risks to capital stock. Optimal adaptation—a mix of firm‐level efforts and public spending—varies as society learns about the adverse consequences of global warming for disaster arrivals. Taxes on capital are needed alongside those on carbon to achieve the first best. We apply our model to country‐level control of flooding from tropical cyclones. Learning rationalizes empirical findings, including the responses of Tobin's q, equity risk premium, and risk‐free rate to disaster arrivals. Adaptation is more valuable under learning than a counterfactual no‐learning environment. Learning alters social‐cost‐of‐carbon projections due to the interaction of uncertainty resolution and endogenous adaptive response. [ABSTRACT FROM AUTHOR]

This paper shows that there is more scope for a borrower to engage in a sustainable infinite debt rollover (a "Ponzi scheme") when interest/growth rates are stochastic. In this context, I prove that the relevant "r vs. g" comparison uses the yield rlong to an infinite‐maturity zero‐coupon bond. I show that rlong is lower than the risk‐neutral expectation of the short‐term yield when it is variable, and that rlong is close to the minimal realization of the short‐term yield when it is highly persistent. The paper applies these results to illustrative heterogeneous agent dynamic stochastic general equilibrium models to obtain similarly weakened sufficient conditions for the existence of public debt bubbles. [ABSTRACT FROM AUTHOR]

We provide strong evidence of flight-to-safety phenomenon from real estate market, with REITs as the proxy, to bond market during elevated real estate market volatility. We use three robust factors; the equity market risk premium, the momentum, and the real estate market volatility to capture the cross-sectional expected excess returns. We consider a comprehensive list of returns on REITs and maturity-sorted treasuries from January 2000 to December 2021 to predict excess returns in the three-factor linear model. We find that the expected returns on real estate market and treasury market exhibit inverse relationship in market risk premium and real estate market volatility loading factors. The momentum factor is strongly significant for the short-maturity treasuries and for the mortgage REITs in general, and for the home financing mortgage REITs in particular. The results are robust when we include macroeconomic variables and the time factor in the analysis. This observation clearly depicts interest sensitivity of these instruments. Our study has critical relevance, from the diversification perspective, in the current US macro-environment of rising inflation and interest rates. [ABSTRACT FROM AUTHOR]

In this article, we use a recently introduced asymmetry measure, IE, to measure the idiosyncratic asymmetry of commodity futures returns and find that idiosyncratic asymmetry negatively and significantly predicts commodity futures returns cross sectionally. Furthermore, we find that a long–short trading strategy based on idiosyncratic asymmetry generates significant abnormal returns, which cannot be explained by traditional risk factors in commodity futures and persists up to 12 months. Moreover, idiosyncratic asymmetry appears to be a priced factor in commodity futures with significant risk premium. Finally, we confirm that IE is better at capturing the pricing effect of idiosyncratic asymmetry than the traditional skewness measure. [ABSTRACT FROM AUTHOR]

We develop a new approach to modeling and predicting stock returns in the presence of breaks that simultaneously affect a large cross-section of stocks. Exploiting information in the cross-section enables us to detect breaks in return prediction models with little delay and to generate out-of-sample return forecasts that are significantly more accurate than those from existing approaches. To identify the economic sources of breaks, we explore the asset pricing restrictions implied by a present value model which links breaks in return predictability to breaks in the cash flow growth and discount rate processes. [ABSTRACT FROM AUTHOR]