We propose a methodology for measuring the market-implied capital of banks by subtracting from the market value of equity (market capitalization) a credit-spread-based correction for the value of shareholders' default option. We show that without such a correction, the estimated impact of a...

Using Indian bank-level data, we examine the cross-sectional returns predictability for banking stocks in view of the distinct industry parameters prevalent in the financial services space. We find the existence of abnormal returns in banking stocks. We also observe that the celebrated...

The purpose of this study is to assess model risk with respect to parameter estimation for a simple binary logistic regression model applied as a predictive model. The assessment is done by comparing the effectiveness of eleven different parameter estimation methods. The results from the...

I study the degree of market integration between U.S. corporate bonds and stocks of their issuers. I document that trading costs and short-selling constraints, which are often imposed on market participants, regularize optimal Sharpe ratio portfolios. These novel trading frictions are consistent...

We develop Residual MisPricing (RMP), an index capturing mispricing relative to a linear benchmark asset pricing model, from the structure imposed by no-arbitrage. RMP is fully conditional and depends only on the returns of basic assets. Return data for several economies reveal that RMP is...

We introduce a class of quantile-based risk measures that generalize Value at Risk (VaR) and, likewise Expected Shortfall (ES), take into account both the frequency and the severity of losses. Under VaR a single confidence level is assigned regardless of the size of potential losses. We allow...

We identify the conditions where robust mean–variance preferences, which capture ambiguity aversion, are observationally nonequivalent to subjective mean–variance preferences. Conversely, we also provide an example showing that observational equivalence holds regardless of the degree of...

We discuss risk measures representing the minimum amount of capital a financial institution needs to raise and invest in a pre-specified eligible asset to ensure it is adequately capitalized. Most of the literature has focused on cash-additive risk measures, for which the eligible asset is a...

We study capital requirements for bounded financial positions defined as the minimum amount of capital to invest in a chosen eligible asset targeting a pre-specified acceptability test. We allow for general acceptance sets and general eligible assets, including defaultable bonds. Since the...

We introduce Implied Volatility Duration (IVD) as a new measure for the timing of uncertainty resolution, with a high IVD corresponding to late resolution. Portfolio sorts on a large cross-section of stocks indicate that investors demand on average more than five percent return per year as a...