In this dissertation, I explore the impact of idiosyncratic risk on asset returns. The first essay examines how idiosyncratic risk affects the cross-section of stock returns. I use an exponential GARCH model to forecast expected idiosyncratic volatility and employ a combination of the size...

Using a unique survey data of Chinese households, we study the impact of house price growth and house price risk on entrepreneurship. House price risk, measured as the sensitivity of house price growth to local GDP growth, negatively impacts the entrepreneurship of homeowners relative to...

We analyze capital allocation in a conglomerate where divisional managers with uncertain abilities compete for promotion to CEO. A manager can sometimes gain by unobservably adding variance to divisional performance. Capital rationing can limit this distortion, increase productive efficiency,...

This paper offers an explanation for the forward discount puzzle in foreign exchange markets based upon investor overconfidence. In our model, overconfident individuals overreact to their information about future inflation differential. The spot and the forward exchange rates differentially...

Evidence indicates that people fear change and the unknown. We offer a model of familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains the endowment effect, portfolio underdiversification, home and local biases....