The term “equity premium puzzle” was coined in 1985 by economists Rajnish Mehra and Edward C. Prescott. The equity premium puzzle in considered one of the most significant questions in finance. A number of papers have explored the fundamental questions of why the premium exists and has not...

We view innovation investment as a real option and explore the implications of ambiguity (Knightian uncertainty) and risk for innovation decisions. Our analysis uses a risk measure and a new outcome-independent measure of ambiguity. We find a consistently significant negative effect of ambiguity...

Real option valuation has traditionally been concerned with investment under project value uncertainty while assuming the agent has perfect confidence in a specific model. However, agents do not generally have perfect confidence in their model and this {\it ambiguity} affects their decisions....

We argue the earnings announcement premium is a measure of firm-specific uncertainty aversion. Our stylized model shows earnings announcements, as pure news events, are priced only if investors are uncertainty averse; further, the earnings announcement return is negatively correlated to future...

We analyze how the presence of financial markets effects the optimal exercise of real options for a risk averse agent. In this process we examine the role of the minimal martingale measure and the Capital Asset Pricing Model (CAPM). Using value-matching and smooth-pasting conditions, we...

Textbooks on financial management have emphasized the shortcomings of the payback criterion for decades. However, empirical evidence suggests that in actual capital budgeting procedures the payback method is used quite regularly. Mostly, it is implemented supplementary to net present value or...

If agents in workhorse business cycle models with financial frictions are allowed to index contracts to observable aggregates, they share aggregate financial risk (almost) perfectly. Thus, the borrowing-constrained capital holders' wealth share does not collapse following adverse shocks and the...

We analyze extensively the characteristics of the solution to an irreversibleinvestment decision when the only source of uncertainty comes from interest rates.They are assumed to be driven by the popular Cox-Ingersoll-Ross (CIR) stochasticprocess. Particular attention is paid to the impact that...

We use a Wicksellian single rotation framework to analyze the impact of the intertemporally fluctuating and stochastic mean-reverting interest rate process on the optimal harvesting threshold and thereby the expected length of the rotation period, when forest value is also stochastic following...

We consider Merton's version of the Solow model Merton (1975), where capital per labor is assumed to follow the diffusion process: dk(t)=[sf(k(t))-(n lambda-sigma2)k(t)]dt sigmak(t)dW(t), with constant per capital savings rate s. Merton defined a golden rule in this context as one for which...