As a consequence of optimal investment choices, firms' assets and growth options change in predictable ways. Using a dynamic model, we show that this imparts predictability to changes in a firm's systematic risk, and its expected return. Simulations show that the model simultaneously reproduces:...

The non-tradability of human capital is often cited for the failure of traditional asset pricing theory to explain agents' portfolio holdings. In this paper we argue that the opposite might be true --- traditional models might not be able to explain agent portfolio holdings because they do not...

This paper presents a general, nonlinear version of existing multifactor models, such as Longstaff and Schwartz (1992). The novel aspect of our approach is that rather than choosing the model parameterization out of thin air,' our processes are generated from the data using approximation methods...

We derive a firm's optimal capital structure and managerial compensation contract when employees are averse to bearing their own human capital risk, while equity holders can diversify this risk away. In the presence of corporate taxes, our model delivers optimal debt levels consistent with those...

This paper analyzes the performance of the commercial mortgage-backed security (CMBS) market before and during the recent financial crisis. Using a comprehensive sample of CMBS deals from 1996 to 2008, we show that (unlike the residential mortgage market) the loans underlying CMBS did not...

An explicit expression for a firm's expected return is developed in a dynamic model of investment at the firm level. Each period, the firm has an option to invest. Past investment decisions account for the firm's existing asset base which is assumed

This paper addresses the question of how an endogenously determined information flow effects the model of dynamically complete markets. We find that the model is not robust to the latitude agents have in deciding when information is revealed. We also show that on the announcement of a change in...

We develop and analyze a model of a multi-stage investment project that captures many features of R\&D ventures and start-up companies. An important feature these problems share is that the firm learns about the potential profitability of the project t

This paper analyzes the dynamics of the commonly used indices for Adjustable Rate Mortgages, and systematically compares the effects of their time series properties on adjustable rate mortgage prepayment and value. Our ARM valuation methodology allows us simultaneously to capture the effects of...