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We present a theory in which the interaction between limited sharing of idiosyncratic labor income risk and labor adjustment costs (that endogenously arise through search frictions) determines interest rate dynamics. In the general equilibrium, the interaction of these two ingredients relates bond risk premiums, cross-sectional skewness of income growth, and labor market tightness. Our model rationalizes an upward-sloping average yield curve and predicts a negative relation between labor market tightness and bond risk premiums. We provide evidence for our theory's mechanism and predictions. [ABSTRACT FROM AUTHOR]

Inspired by experimental evidence, we amend the recursive utility model to let risk aversion decrease with the temporal horizon. Our pseudo-recursive preferences remain tractable and retain appealing features of the long-run risk framework, notably its success at explaining asset pricing moments. In addition, our model addresses two challenges to the standard model. Calibrating the agents' preferences to explain the equity premium no longer implies an extreme preference for early resolutions of uncertainty. Horizon-dependent risk aversion helps resolve key puzzles in finance on the valuation of assets across maturities and captures the term structure of equity risk premiums and its dynamics. [ABSTRACT FROM AUTHOR]

Our paper reexamines whether 29 variables from 26 papers published after Goyal and Welch 2008 , as well as the original 17 variables, were useful in predicting the equity premium in-sample and out-of-sample as of the end of 2021. Our samples include the original periods in which these variables were identified, but end later. More than one-third of these new variables no longer have empirical significance even in-sample. Of those that do, half have poor out-of-sample performance. A small number of variables still perform reasonably well both in-sample and out-of-sample. [ABSTRACT FROM AUTHOR]

We introduce a new approach to estimating long-term aggregate discount rates using the cross section of earnings and book values to explain current stock prices and extract expected market returns. The proposed discount rate measure is countercyclical. Shocks to it account for nearly half of historical market return variation; in contrast, shocks to other discount rate measures account for no more than 2%. It dominates other measures in explaining time-series variation in returns on duration-sorted portfolios and delivers out-of-sample predictability that exceeds that afforded by other expected return measures and predictive variables. It also performs well in international equity markets. [ABSTRACT FROM AUTHOR]

We study a large currency cross-section using asset pricing methods that account for omitted-variable and measurement-error biases. First, we show that the pricing kernel includes at least three latent factors that resemble (but are not identical to) a strong U.S. "dollar" factor and two weak high Sharpe ratio "carry" and "momentum" slope factors. Evidence for an additional "value" factor is weaker. Second, using this pricing kernel, we find that only a small fraction of the over 100 nontradable candidate factors considered have a statistically significant risk premium, mostly relating to volatility, uncertainty, and liquidity conditions, rather than macro variables. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

We study how derivatives (with nonlinear payoffs) affect the underlying asset's liquidity. In a rational expectations equilibrium, informed investors expect low conditional volatility and sell derivatives to the others. These derivative trades affect different investors' utility differently, possibly amplifying liquidity risk. As investors delta hedge their derivative positions, price impact in the underlying drops, suggesting improved liquidity, because informed trading is diluted. In contrast, effects on price reversal are ambiguous, depending on investors' relative delta hedging sensitivity (i.e., the gamma of the derivatives). The model cautions of potential disconnections between illiquidity measures and liquidity risk premium due to derivatives trading. [ABSTRACT FROM AUTHOR]

The opening of equity markets to foreign investment by developing countries appears to generate an enormously large positive growth effect (see Bekaert, Harvey, and Lundblad (2005), Journal of Financial Economics 77, 3–55) in spite of a relatively small role of such markets for financing investment in most economies. We propose a spillover channel from equity market opening to lower costs of bank loans, which helps to explain this puzzle. From analyzing bank loan data associated with China's introduction of the Qualified Foreign Institutional Investors program, we find significant support for this channel. Furthermore, we show that a reduction in the risk premium in loans is an important mechanism. [ABSTRACT FROM AUTHOR]

Consistent with the empirical properties of the consumption data, I develop a model in which consumption and dividend growth follow regime-switching dynamics. I show that regime-shift risk is priced in the model. Regime-shift risk exhibits dominant influence on asset prices: It generates a high equity premium and also induces time-varying risk premiums. The model explains major business cycle-dependent asset market phenomena and, in particular, the stronger predictability of stock returns during recessions. [ABSTRACT FROM AUTHOR]

Do government policies during the COVID-19 pandemic affect investors' risk aversion, as proxied by the variance premium? To answer this question, this study examines data regarding government responses from thirteen countries. The empirical analysis indicates that government interventions were not able to substantially reduce variance risk premium in international equity markets. The results also show that economic support policies, containment, and closure regulations, and health system interventions all played a significant role in shaping equity variance risk price. [ABSTRACT FROM AUTHOR]

This article estimates the weighted average cost of capital (WACC) for the energy sector in Ecuador, a country with a dollarized economy and illiquid stock markets. Thus, reference companies in the region were taken, and at the same time combined with characteristics of national companies, establishing a useful methodology, which makes sense with the acceptable discount rates in the Ecuadorian economy. For the above, four estimation alternatives were used. In method one, the traditional WACC formula was applied using interest rates and risk premiums from the U.S. market, which resulted in an overestimation due to the double penalty of the country risk and the U.S. market premium. Method two adjusted the market risk premium to consider only the Ecuador-specific risk premium, thus avoiding the double penalty. In method three, the credit default swap (CDS) was used to calculate the country risk premium, and the CDS was excluded from the nominal interest rate, avoiding redundancies. Finally, method four combined the U.S. interest rate with the CDS directly to calculate the market risk premium, more accurately reflecting local economic conditions in a dollarized economy. The WACC results range from 12.63% to 29.70%. In addition, a dummy variable was controlled for during the pandemic period. This article highlights the need for methodologies adapted to emerging markets, since traditional approaches would overestimate the WACC. [ABSTRACT FROM AUTHOR]

This study examines how housing sector volatilities affect real estate investment trust (REIT) equity return in the United States. I argue that unexpected changes in housing variables can be a source of aggregate housing risk, and the first principal component extracted from the volatilities of U.S. housing variables can predict the expected REIT equity returns. I propose and construct a factor-based housing risk index as an additional factor in asset price models that uses the time-varying conditional volatility of housing variables within the U.S. housing sector. The findings show that the proposed housing risk index is economically and theoretically consistent with the risk-return relationship of Merton's conditional Intertemporal Capital Asset Pricing Model (ICAPM) (1973), which predicts an average maximum of 1.83 percent of annual housing risk premium in REIT equity return. Moreover, the housing risk index explains a significant portion of the cross-sectional variation of sectoral REIT returns. In cross-section, the positive risk-return relationship remains significant after controlling for VIX, Fama–French four factors, and a broad set of macroeconomic and financial variables. I also find that the proposed housing beta accurately forecasts U.S. macroeconomic and financial conditions. [ABSTRACT FROM AUTHOR]

This study examines the co-movement between geopolitical risk (GPR), energy price, and bitcoin (BTC) in BRICS countries, namely Brazil, Russia, India, China, and South Africa. Previous studies have focused on the impact of GPR on the volatility and risk premium of BTC investment. However, very limited studies have focused on integrating BTC as an extension of the mix of GPR on the co-movement with energy price. The analysis is based on monthly data of GPR index for BRICS countries, brent oil futures, natural gas futures and BTCs covering the period between March 2012 and Jun 2021. We employ the Bayesian graphical structural vector autoregressive model and time-varying parameter vector autoregressions-based dynamic connectedness to investigate the network-dependence structure. This research project provides useful empirical evidence for assessing the impact of both BTC and GPR on energy prices. Nonetheless, it will also be informative about the likelihood of co-movements occurring at different stages. [ABSTRACT FROM AUTHOR]

We develop a methodology to decompose the conditional market risk premium and risk premia on higher-order moments of excess market returns into risk premia related to contingent claims on down, up, and moderate market returns. The decomposition exploits information about the risk-neutral market return distribution embedded in option prices, but does not depend on assumptions about the functional form of investor preferences or about the market return distribution. The total market risk premium is highly time-varying, as are the contributions from downside, upside, and central risk. Time-series variation in risk premia associated with each region is primarily driven by variation in risk prices associated with the probability of entering each region at short horizons, but it is primarily driven by variation in risk quantities at longer horizons. Analogous decompositions implied by prominent representative agent models generally fail to match the dynamic risk premium behavior implied by the data. Our results provide a set of new empirical facts regarding the drivers of conditional risk premia and identify new challenges for representative agent models. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The internet appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01663. [ABSTRACT FROM AUTHOR]

Forecasts of professional forecasters are anomalous: they are biased, and forecast errors are autocorrelated and predictable by forecast revisions. We propose that these anomalies arise because professional forecasters do not know the model that generates the data. We show that Bayesian agents learning about hard-to-learn features of the world can generate all the prominent aggregate anomalies emphasized in the literature. We show this for professional forecasts of nominal interest rates and Congressional Budget Office forecasts of gross domestic product growth. Our learning model for interest rates can explain observed deviations from the expectations hypothesis of the term structure without relying on time variation in risk premia. [ABSTRACT FROM AUTHOR]

We introduce a new methodology to conduct simultaneous inference of the non‐parametric component in partially linear time series regression models where the non‐parametric part is a multi‐variate unknown function. In particular, we construct a simultaneous confidence region (SCR) for the multi‐variate function by extending the high‐dimensional Gaussian approximation to dependent processes with continuous index sets. Our results allow for a more general dependence structure compared to previous works and are widely applicable to a variety of linear and non‐linear autoregressive processes. We demonstrate the validity of our proposed methodology by examining the finite‐sample performance in the simulation study. Finally, an application in time series, the forward premium regression, is presented, where we construct the SCR for the foreign exchange risk premium from the exchange rate and macroeconomic data. [ABSTRACT FROM AUTHOR]

In the financial system, the customers' willingness to share their data is pivotal, because otherwise, banks and insurance companies are powerless to build on customer data. The key step now is to understand whether there is such willingness and what form it takes. In this study, we investigate how willing customers are to share various kinds of data (on physical health, home, driving style, travel, family, social networks) with their insurance company, in return for different rewards (customised products and services, reduced insurance claims risk and insurance premiums adjusted to personal habits and behaviour). Applying the privacy calculus framework to 1501 responses in a web-based survey, we found that rewards, especially when financial, such as insurance premium benefits, play a pivotal role in driving customer decisions about sharing data. Furthermore, customers associate the data they are asked to share with different levels of privacy, influencing their willingness to share. We also found that, when customers are asked to share various kinds of data in return for different rewards, their own personal innovativeness comes into play. Our findings suggest that, in the data-driven insurance business, different rewards offered in return for specific types of data could help companies minimise the "data acquisition cost" and maximise the data collected. In the era of open data, insurers can explore the many opportunities for segmentation, but new kinds of financial exclusion could emerge, resulting in potential biases and thus misinterpretations should analytics and artificial intelligence models be built upon these premises. [ABSTRACT FROM AUTHOR]

There are some connections between aging notions, stochastic orders, and expected utilities. It is known that the DRHR (decreasing reversed hazard rate) aging notion can be characterized via the comparative statics result of risk aversion, and that the location-independent riskier order preserves monotonicity between risk premium and the Arrow–Pratt measure of risk aversion, and that the dispersive order preserves this monotonicity for the larger class of increasing utilities. Here, the aging notions ILR (increasing likelihood ratio), IFR (increasing failure rate), IGLR (increasing generalized likelihood ratio), and IGFR (increasing generalized failure rate) are characterized in terms of expected utilities. Based on these observations, we recover the closure properties of ILR, IFR, and DRHR under convolution, and of IGLR and IGFR under product, and investigate the closure properties of the dispersive order, location-independent riskier order, excess wealth order, the total time on test transform order under convolution, and the star order under product. We have some new findings. [ABSTRACT FROM AUTHOR]

The Journal of Portfolio Management has published a special issue that includes in-depth interviews with four chief investment officers (CIOs) and five theme-oriented articles on critical investment topics. The interviews provide insights into the decision-making processes and strategies of influential asset management companies. The CIOs emphasize the importance of long-term strategies, technology, risk management, client expectations, and leadership styles. The theme-oriented articles cover topics such as fixed-income investing, portfolio diversification in the post-COVID era, leadership in investment management, and the complexities of integrating environmental, social, and governance (ESG) factors into investment portfolios. The articles offer valuable insights into the evolving investment landscape and provide practical knowledge for market professionals. [Extracted from the article]

This paper examines the possible nonlinear relationship between public debt and income inequality. The literature extensively examines the non-linear growth effects of public debt, whereas its inequality effects are not investigated sufficiently. Public debt can be used to finance distributive policies, thereby improving income equality. However, high public debt levels can also harm economic growth and decrease the fiscal space due to sustainability concerns, high risk premia, and large debt service burden. Hence, it is possible that public debt can have non-linear effects on inequality. The empirical analysis documents that the relationship between public debt and inequality is positive with a declining marginal effect in the case of advanced countries. However, developing countries display a U-shape relationship, implying that public debt is initially associated with declines in inequality, while higher levels of debt are associated with higher levels of inequality. The analysis also shows that the determinants of inequality can differ greatly between advanced and developing countries. [ABSTRACT FROM AUTHOR]

This paper exploits the concept of expectation dependence to propose an alternative representation of the consumption-based capital asset pricing model (C-CAPM). While the first-degree expectation dependence (FED) drives the C-CAPM's riskiness for a risk-averse investor, the second-degree expectation dependence (SED) is required to account for the downside risk faced by a prudent investor. Theoretical and empirical assessments reveal that the expectation dependence-based C-CAPM can realistically match equity and variance risk premia. The consumption SED risk emerges as a fundamental source of uncertainty driving asset prices. [ABSTRACT FROM AUTHOR]

Small stocks' time‐varying spreads predict future return gap between small and large stocks. To optimally exploit such predictability, the investor captures current risk premium by purchasing at large spreads with substantially reduced turnover; uses an aim‐in‐front‐of‐the‐target approach to trade‐off between future risk premium and current transaction costs; and meets hedging demand at low costs. Strong interaction between transaction costs and return predictability leads to large losses from myopic trading. Greater variability of the spread is advantageous for investors who trade optimally but detrimental for investors who trade myopically. The spread‐based return predictability significantly increases the investment value of small stocks. [ABSTRACT FROM AUTHOR]

How are contracts structured in the presence of relationship-specific investments when legal enforcement is weak? Using a new audit methodology, we show that simple financial contracts in combination with social norms and reputation concerns can sustain relationship-specific transactions. Wholesalers in the market for pens in India use upfront payments rather than increased risk premiums to mitigate risks arising from relationship-specific investments. Upfront payments for printed pens cover only 40 percent of the production costs, highlighting the importance of upfront payments as a screening device. Ex-post, renegotiation is more likely for printed pens, but in a substantial fraction of cases, renegotiation fails. [ABSTRACT FROM AUTHOR]

We examine the commonalities in international equity risk premiums by linking empirical evidence for the ability of U.S. downside and upside variance risk premiums (DVP and UVP, respectively) to predict international stock returns with implications from an empirical model featuring asymmetric economic uncertainty and risk aversion. We find that DVP and UVP predict international stock returns through U.S. bad and good macroeconomic uncertainties, respectively. Sixty percent to 80% of the dynamics of the global equity risk premium for horizons under seven months are driven by economic uncertainty, whereas risk aversion appears more relevant for longer horizons. The predictability patterns of DVP and UVP vary across countries depending on those countries' financial and economic exposure to global shocks. In those with higher economic exposure, investors demand higher compensation for bad macroeconomic uncertainty but lower compensation for good macroeconomic uncertainty, whereas the compensation for bad macroeconomic uncertainty is lower for countries with high financial exposure. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The data and online appendices are available at https://doi.org/10.1287/mnsc.2023.4958. [ABSTRACT FROM AUTHOR]

We empirically study the relationship between currency excess returns and current account uncertainty, measured as forecast dispersion. We find that investment currencies deliver low returns, whereas funding currencies offer a hedge when current account uncertainty is unexpectedly high. Moreover, an increase in current account uncertainty is associated with higher expected future excess returns on investment currencies. This mechanism is consistent with the recent advances in exchange rate theory based on capital flows in imperfect financial markets. This paper was accepted by Gustavo Manso, finance. Funding: A. Krecetovs thanks the Brevan Howard Centre at Imperial College London for financial support. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4949. [ABSTRACT FROM AUTHOR]

This paper documents that the ratio of residential-to-nonresidential investment is a strong in-sample and out-of-sample predictor for the dollar up to 12 quarters. The predictability is robust to a battery of additional checks and holds for other G10 currencies. We explain the predictability in an analytical model with time-varying housing preference, productivity, and volatility. In the model, the U.S. housing investment share is higher during periods with higher growth and lower uncertainty, corresponding to lower future nontradable prices, dollar index, and excess returns. We find strong empirical support for the channel. Alternative explanations, including the business and financial cycle, find less empirical support. This paper was accepted by David Sraer, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4932. [ABSTRACT FROM AUTHOR]

This paper employs insights from earth science on the financial risk of project developments to present an economic theory of critical minerals. Our theory posits that back-ended critical mineral projects that have unaddressed technical and non-technical barriers, such as those involving lithium and cobalt, exhibit an additional risk for investors which we term the "back-ended risk premium". We show that the back-ended risk premium increases the cost of capital and, therefore, has the potential to reduce investment in the sector. We posit that the back-ended risk premium may also reduce the gains in productivity expected from artificial intelligence (AI) technologies in the mining sector. Progress in AI may, however, lessen the back-ended risk premium itself by shortening the duration of mining projects and the required rate of investment by reducing the associated risk. We conclude that the best way to reduce the costs associated with energy transition is for governments to invest heavily in AI mining technologies and research. Vespignani and Smyth present an economic theory of risk in critical minerals they term the "back-ended risk premium." They apply AI approaches to reduce this risk premium and lower costs in energy transition. [ABSTRACT FROM AUTHOR]

We focus on analyzing the risk preferences of suppliers regarding two types of financing: partial credit guarantee (PCG) and trade credit financing (TCF). Using the conditional value-at-risk (CVaR) criterion, we study each supply chain member's equilibrium solution and optimal financing strategy under the assumption of demand distributions with an increasing failure rate. Initially, we present an analytical solution of the risk-averse supplier's wholesale price, and prove that the optimal wholesale price decreases in the risk-averse level and initial capital, and increases in the credit guarantee ratio. Furthermore, we derive optimal financing strategies for both the supplier and the retailer under various circumstances. However, it is important to note that the results reveal a potential trade-off associated with PCG. While risk-averse suppliers may be more inclined to provide PCG compared to risk-neutral suppliers, this financing option can negatively impact the supplier's utility and the expected profits of the retailers. Finally, we illustrate how the optimal financing strategies shift in response to changes in the risk-averse level and credit guarantee ratio, and present the win-win situations for the supplier and the retailer. [ABSTRACT FROM AUTHOR]

Insurance is an important element of flood risk management, providing financial compensation after disastrous losses. In a competitive market, insurers need to base their premiums on the most accurate risk estimation. To this end, (recent) historic loss data are used. However, climate variability can substantially affect flood risk, and anticipating such variations could provide a competitive gain. For instance, for a year with higher flood probabilities, the insurer might raise premiums to hedge against the increased risk or communicate the increased risk to policyholders, encouraging risk-reduction measures. In this explorative study, we investigate how seasonal flood forecasts could be used to adapt flood insurance premiums on an annual basis. In an application for Germany, we apply a forecasting method that predicts winter flood probability distributions conditioned on the catchment wetness in the season ahead. The deviation from the long term is used to calculate deviations in expected annual damage, which serve as input into an insurance model to compute deviations in household insurance premiums for the upcoming year. Our study suggests that the temporal variations in flood probabilities are substantial, leading to significant variations in flood risk and premiums. As our models are based on a range of assumptions and as the skill of seasonal flood forecasts is still limited, particularly in central Europe, our study is seen as the first demonstration of how seasonal forecasting could be combined with risk and insurance models to inform the (re-)insurance sector about upcoming changes in risk. [ABSTRACT FROM AUTHOR]

Delta‐hedged option selling strategies typically yield positive returns, owing to the volatility risk premium embedded in the option price. Recent research based on S&P 500 options has found a day–night asymmetry in option returns. We find a similar disparity in the returns for short Nifty option strategies. Positive and significant overnight option returns are accompanied by negative intraday returns. The day–night asymmetry is robust across option categories and subsamples but weaker on days with significant jumps in the underlying. We confirm that the variance risk premium earned by option sellers is mainly a reward for overnight risk. [ABSTRACT FROM AUTHOR]

Copyright of International Journal of Disciplines Economics & Administrative Scienves Studies is the property of International Journal of Disciplines in Economics & Administrative Sciences Studies and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Copyright of International Journal of Disciplines Economics & Administrative Scienves Studies is the property of International Journal of Disciplines in Economics & Administrative Sciences Studies and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We consider the canonical trade model with heterogeneous firms, love for variety and trade costs, and integrate it in the consumption CAPM model. This yields a structural gravity equation that includes an additional factor related to risk premia. Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns. [ABSTRACT FROM AUTHOR]

Asset pricing and climate policy are analyzed in a global economy where consumption goods are produced by both a green and a carbon‐intensive sector. Given that the economy is initially heavily dependent on carbon‐intensive capital, the desire to diversify assets complements the attempt to mitigate economic damages from climate change. In the longer run, however, a trade‐off between diversification and climate action emerges. We derive the optimal carbon price and the equilibrium risk‐free rate, and risk premia. Climate disasters significantly decrease the risk‐free rate but increase risk premia on financial assets, especially if no climate policy is implemented. [ABSTRACT FROM AUTHOR]

Climate change and environmental issues have received increasing attention across the world. China's governmental targets for carbon peak and carbon neutralization show the ambition and efforts necessary in challenging these problems. The transportation industry will be crucial in reducing carbon emissions. Based on the green patent application data in China's new energy vehicle (NEV) industry from 2006 to 2021, this article focuses on risk premium of green technology innovation. In particular, the premium effects of the green technology innovation and the cooperative network are empirically examined. Furthermore, two channels that play a role in generating the premium are investigated, i.e., attracting market attention and reducing financing constraints. The empirical results show that the stock returns are positively correlated to the green technology innovation and the company's central position in the cooperative network, i.e., there exist the premium effects of green technology innovation in China's NEV industry. The positional advantage in the cooperative innovation network can further increase analyst following and reduce financing constraints. The research can provide evidence and policy implications for the government, companies and investors. [ABSTRACT FROM AUTHOR]

Purpose: Given the difficulties in finding significant exchange rate exposure in the extant literature, this paper attempts to resolve the so-called "exposure puzzle" by investigating whether currency movements have any significant impact on international industry returns. Design/methodology/approach: This paper utilizes the multivariate Generalized AutoRegressive Conditional Heteroskedasticity (MGARCH) methodology to estimate both symmetric and asymmetric exchange rate exposures for each industry common across 12 countries simultaneously. Findings: The empirical results show that exchange rate exposure is not only statistically significant but also economically important based on the estimation of an asymmetric three-factor exposure model using MGARCH methodology. This is an extremely important finding as it suggests that the "exposure puzzle" may not be a puzzle at all once a better methodology is utilized in the estimation. Research limitations/implications: Because this study tries to resolve the exchange rate exposure puzzle by focusing on whether exchange rate movements affect ex-post returns as opposed to ex ante expected returns and given the significant exposures with respect to different risk factors found in the study, it is interesting to see if any of these risk factors commands a risk premium. In other words, a natural extension of this study is to test whether any of these risk factors is priced in international industry returns. Practical implications: The findings of the study have interesting implications for international investors who would like to diversify their portfolios across different industries and are concerned about whether the unexpected movements in the bilateral exchange rates will affect their portfolio returns in addition to its interest rate and world market risk exposures. Originality/value: The study utilizes the MGARCH methodology, which has not been fully exploited in the exchange rate exposure literature. [ABSTRACT FROM AUTHOR]

We synthetically create option contracts on a corporate bond index using CDX swaptions, overcoming the limitations that stem from the lack of traded corporate bond options. Our approach allows us to estimate forward-looking moments concerning the corporate bond market in a model-free manner. By constructing an aggregate volatility measure and the associated variance risk premium, we examine the role of volatility risk in the corporate bond market. We highlight that the ex ante conditional second and higher moments we estimate from synthetic corporate bond options carry important implications for credit risk models, providing an extra basis for testing their validity. [ABSTRACT FROM AUTHOR]

We analyze the role of international reserves and sovereign debt in the determination and international transmission of interest rates. We develop a model that describes the money market equilibrium with capital account openness. It predicts that higher levels of international reserves lead to lower interest rates whereas the effect of higher government debt is ambiguous. We then test empirically these predictions on a panel of 128 countries over 1985–2019. We find that: (i) the transmission of U.S. interest rates to domestic interest rates is stronger in emerging market economies (EMEs) than in advanced economies (AEs) for short‐term interest rates (STIR), and vice versa for long‐term interest rates (LTIR); (ii) international reserves help counteract the transmission of the U.S. policy rate on STIR in EMEs; (iii) a higher sovereign debt level is associated with lower interest rates in EMEs (liquidity effect), but higher interest rates in developing economies (risk premium effect). [ABSTRACT FROM AUTHOR]

This study examines whether the disposition effect can explain time‐varying risk preference and predict the equity risk premium. To do so, we propose an augmented general autoregressive conditional heteroskedasticity (GARCH)‐in‐Mean model unraveling the complex relationship between unrealized gains/losses, realized returns, and the equity risk premium. In our model, the risk aversion coefficient varies with the market state of unrealized gains/losses. Using data from the US stock markets, we show strong evidence that the disposition effect drives time‐varying risk preference: The risk aversion coefficient is significantly positive during periods of unrealized gains, but insignificant during periods of unrealized losses. These findings reconcile the conflicting results of the risk‐return trade‐off in existing literature. Moreover, our model shows significant predictability of the equity risk premium, both in‐sample and out‐of‐sample. Incorporating our model's predictions can yield substantial utility gains for a mean‐variance investor. Our results indicate that the disposition effect leads to time‐varying risk preference and thus induces equity risk premium predictability. [ABSTRACT FROM AUTHOR]

We explore the impact of management team ability on firm‐level accounting comparability. Through using a sample of Chinese listed firms from 2009 to 2022, the paper documents that accounting comparability has an inverse U‐shaped association with management team ability where a certain level of managerial ability leads to the highest levels of accounting comparability. Further analysis shows that high‐ability managers have different incentives on accounting comparability when compared to low‐ability managers, especially when they suffer financing constraints, possess more proprietary information, experience weak market environment, bear excessive price risk and risk premium and work in the politically connected firms. [ABSTRACT FROM AUTHOR]

We estimate a model-free term structure of the ex ante dividend risk premium by combining two data sets with different information about future dividends. We aggregate survey forecasts about future dividends for single companies over multiple horizons to construct a term structure of expected S&P 500 dividend growth rates. We use European call and put option prices on the S&P 500 to estimate the term structures of options-implied dividend growth rates and risk-free rates. Applying the method to 2004–2021 data offers a new, ex ante perspective on the conditional time variation of the term structure of the dividend risk premium. [ABSTRACT FROM AUTHOR]

We decompose long-term nominal bond yields into real and inflation components in an international context using inflation-linked and nominal bonds. In contrast to extant results, real rate variation dominates the variation in inflation-linked and nominal yields. Cross-country nominal and inflation-linked yield correlations have declined since the Great Recession. Real rates are the main source of the correlation between nominal yields. Our results are robust to various alternative measurements of inflation expectations and the liquidity premium. They continue to hold when a no-arbitrage term structure model with real, nominal, and inflation factors is used to effect the yield decomposition. [ABSTRACT FROM AUTHOR]

This paper provides new evidence on the pricing of market skewness risk by incorporating investor sentiment in the relation between sensitivity to innovations in implied market skewness and expected stock returns. Using both univariate and multivariate specifications, we conduct an extensive series of asset pricing tests on the cross-section of stocks during high and low sentiment periods separately. We find that market skewness risk carries a negative premium that cannot be explained away by known risk factors when sentiment is low. In contrast, the results are not conducive to a risk explanation when sentiment is high. [ABSTRACT FROM AUTHOR]

This paper analyses the effects of the extraordinary measures implemented by the Central Bank of Mexico during the COVID-19 pandemic on financial conditions. For this purpose, we estimate a factor-augmented vector autoregressive model for the period 2001–2021. Based on this model, we construct a Financial Conditions Index, estimate the response of this indicator and its components from a shock to the outstanding amount of these measures, and conduct a counterfactual exercise to further analyse the effect of the aforementioned measures. The main results indicate that these extraordinary measures seem to have contributed to improve financial conditions. In particular, we find that if these measures had not been implemented, the sovereign risk premium, the 10-year government bond yield, the slope of the yield curve, and the long- and short-term yield spreads between Mexico and the US would have been higher by around 56, 31, 27, 37, and 49 basis points in December 2020, respectively. At the same time, the Mexican peso/US dollar exchange rate and its volatility would have been higher by 5 and 2 percentage points, respectively. In turn, the Mexican stock market index would have been lower by 10 percentage points. [ABSTRACT FROM AUTHOR]

The variance risk premium is a critical predictor of expected returns. However, numerous studies indicate that expected returns depend strongly on the state of the economy. Herein, we examine the effect of the variance risk premium in different market states by using cross – sectional regression and predictability of returns. Our empirical results show that the variance risk premium is a significantly priced factor in bull markets. Additionally, predicted return horizons are shorter in bear markets than in bull markets. Compared with that in bull markets, the predictive ability of the variance risk premium diminishes more rapidly in bear markets when the horizon period is lengthened. [ABSTRACT FROM AUTHOR]

This study investigates the contradiction in the finding of a positive distress risk premium in Vassalou and Xing's study and the finding of a negative distress risk premium, i.e., a distress risk discount, in several other studies. Using the default likelihood measure calculated following Vassalou and Xing's procedure for 1965–2023, we show that excluding outliers and including the time period beyond the end of Vassalou and Xing's sample period in 1999 makes a difference in the results. Overall, using portfolio sorting and Fama-MacBeth regressions, this study supports the existence of a distress risk discount. This study also documents that the financial distress risk is negatively reflected in security prices even after accounting for size and book-to-market risk factors. Furthermore, it demonstrates that the negative distress risk premium is strong and persistent across economic expansions, recessions, and the COVID-19 pandemic. [ABSTRACT FROM AUTHOR]

This study aims to answer the question about the interactions between "investors' fear", two factors proposed by Fama & French, the Carhart momentum factor, andthe risk premium, and how these interactions were affected by two financial crises, the Dot-Com and Sub-Prime crises. This paper is the first empirical study that considers the effects of these financial crises. It is of critical importance as it changes the specificity of the empirical models for different periods, significantly affecting the results compared to previous research work. The main findings include a general negative change in fear over all of the sub-periods. Secondly, no consistent positive trend was observed in any of the risk premiums over time. After each crisis, the relationships between the endogenous variables had significant changes. More specifically, investors' fear, on the first day of the week, appears to be systematically higher across all sub-periods except during the Sub-Prime crisis. Finally, after the Sub-Prime financial crisis, there is an almost complete loss of the explanatory power of the VAR models. Although fear does not seem to affect risk premiums or momentum, it was nevertheless found that the results are sensitive to the specification of the models. [ABSTRACT FROM AUTHOR]

Microinsurance is a risk management tool for low-income households. However, its adoption is low in Ghana. This study examines the determinants of microinsurance adoption in Ghana, analysing primary data from 1453 households across six key markets and three regions. We also gathered secondary data from 14 microinsurance firms and 47 microinsurance products between 2017 and 2021. We estimate the critical factors influencing microinsurance uptake using robust probit, fixed-effects and panel-corrected standard error models. Our findings indicate that income levels, trust in financial institutions and participation in community risk management groups and the national health insurance scheme are the key determinants affecting microinsurance adoption. Firm- and product-specific factors such as affordability, outstanding claims, risk premiums and benefits paid to microinsurance participants also influence adoption. This study also highlights the crucial role of structural, social and economic factors in predicting demand for microinsurance, utilising Outreville's four-factor insurance demand framework. [ABSTRACT FROM AUTHOR]

Purpose: Throughout the 21st century, US households have experienced unprecedented levels of leverage. This dynamic has been exacerbated by income shortfalls during the COVID-19 crisis. Leveraging and deleveraging decisions affect household consumption. This study investigates the effect of the dynamics of household leverage and consumption on the stock market. Design/methodology/approach: The authors explore the relation between household leverage and consumption in the context of the consumption capital asset pricing model (CCAPM). The authors test the model's implication that leverage has a negative risk premium by transforming the asset pricing restriction into an unconditional linear factor model and estimate the model using the general method of moments procedure. The authors run time-series regressions to estimate individual stocks' exposures to leverage, and cross-sectional regressions to investigate the leverage risk premium. Findings: The authors show that shocks to household debt have strong and lasting effects on consumption growth. The authors extend the CCAPM to accommodate this effect and find, using various test assets, a negative risk premium associated with household deleveraging. Looking at individual stocks the authors show that the deleveraging risk premium is not explained by well-known risk factors. Originality/value: This paper contributes to the literature on the role of leverage in economics and finance by establishing a relation between household leverage and spending decisions. The authors provide novel evidence that households' leveraging and deleveraging decisions can be a fundamental and influential force in determining asset prices. Further, this paper argues that household leverage might explain the small, persistent, and predictable component in consumption growth hypothesised in the long-run risk asset pricing literature. [ABSTRACT FROM AUTHOR]