Found 4 article(s) for author 'Financing Risk'

Risk Neglect in Equity Markets

Risk Neglect in Equity Markets. Malcolm Baker, Spring 2016, Paper. “The link between measures of risk and return within the equity market has been very weak over the past 47 years: in the United States, returns on high-risk stocks have cumulatively fallen short of the returns on low-risk stocks, during a period when the equity market as a whole experienced high returns relative to Treasury bills. In the spirit of Fischer Black’s 1993 article “Beta and Return,” published in this journal, the author takes seriously the idea that this evidence reflects a risk anomaly—a mispricing of risk for behavioral and institutional reasons—and revisits the associated implications for investing and corporate finance, examining asset allocation, high leverage in financial firms, low leverage in industrial firms, private equity, venture capital, and bank capital regulation along the way. Many of these implications fit nicely with Black’s original conjectures, and the author highlights refinements and additions to the original list.Link

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Options-Pricing Formula with Disaster Risk

Options-Pricing Formula with Disaster Risk. Robert Barro, January 2016, Paper. “A new options-pricing formula applies to far-out-of-the money put options on the overall stock market when disaster risk is the dominant force, the size distribution of disasters follows a power law, and the economy has a representative agent with Epstein-Zin utility. In the applicable region, the elasticity of the put-options price with respect to maturity is close to one. The elasticity with respect to exercise price is greater than one, roughly constant, and depends on the difference between the power-law tail parameter and the coefficient of relative risk aversion, γ.Link

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Rare Events and Long-Run Risks

Rare Events and Long-Run Risks. Robert Barro, January 2016, Paper. “Rare events (RE) and long-run risks (LRR) are complementary elements for understanding asset-pricing patterns, including the average equity premium and the volatility of equity returns. We construct a model with RE (temporary and permanent parts) and LRR (including stochastic volatility) and estimate this model with long-term data on aggregate consumption for 42 economies. RE typically associates with major historical episodes, such as the world wars and the Great Depression and analogous country- specific events. LRR reflects gradual and evolving processes that influence long-run growth rates and volatility.Link

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Investment Cycles and Startup Innovation

Investment Cycles and Startup Innovation. Ramana Nanda, Matthew Rhodes-Kropf, November 2013, Paper. “We find that VC-backed firms receiving their initial investment in hot markets are more likely to go bankrupt, but conditional on going public are valued higher on the day of their IPO, have more patents, and have more citations to their patents. Our results suggest that VCs invest in riskier and more innovative startups in hot markets (rather than just worse firms). This is true even for the most experienced VCs. Furthermore, our results suggest that the flood of capital in hot markets also plays a causal role in…” Link

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