Related papers: The Co-Pricing Factor Zoo

We introduce a simple and tractable methodology for estimating semiparametric conditional latent factor models. Our approach disentangles the roles of characteristics in capturing factor betas of asset returns from ``alpha.'' We construct…

Income and risk coexist, yet investors are often so focused on chasing high returns that they overlook the potential risks that can lead to high losses. Therefore, risk forecasting and risk control is the cornerstone of investment. To…

In the standard equilibrium and/or arbitrage pricing framework, the value of any asset is uniquely specified from the belief that only the systematic risks need to be remunerated by the market. Here, we show that, even for arbitrary large…

While asset-pricing models increasingly recognize that factor risk premia are subject to structural change, existing literature typically assumes that investors correctly account for such instability. This paper studies how investors…

This study deals with the pricing and hedging of single-tranche collateralized debt obligations (STCDOs). We specify an affine two-factor model in which a catastrophic risk component is incorporated. Apart from being analytically tractable,…

We propose a parsimonious class of arbitrage-free, yields-only dynamic term structure models (DTSMs) with unspanned latent risks. To enable sequential estimation and forecasting, we develop a Sequential Monte Carlo framework that combines…

Estimating the covariance of asset returns, i.e., the risk model, is a key component of financial portfolio construction and evaluation. Most risk modeling approaches produce a factor model that decomposes the asset variability into two…

The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…

In the "positive interest" models of Flesaker-Hughston, the nominal discount bond system is determined by a one-parameter family of positive martingales. In the present paper we extend this analysis to include a variety of distributions for…

We show that the martingale component in the long-term factorization of the stochastic discount factor due to Alvarez and Jermann (2005) and Hansen and Scheinkman (2009) is highly volatile, produces a downward-sloping term structure of bond…

We investigate whether the tails of firm-level idiosyncratic return distributions are driven by common shocks. We use quantile factor analysis to extract such common idiosyncratic quantile factors with asymmetric pricing effects and we find…

We study factor models that combine latent factors with firm characteristics and propose a new framework for modeling, estimating, and inferring pricing errors. Following Zhang (2024), our approach decomposes mispricing into two distinct…

We propose a model for the credit markets in which the random default times of bonds are assumed to be given as functions of one or more independent "market factors". Market participants are assumed to have partial information about each of…

This paper investigates asset allocation problems when returns are predictable. We introduce a market-timing Bayesian hierarchical (BH) approach that adopts heterogeneous time-varying coefficients driven by lagged fundamental…

Motivated by practical applications, we explore the constrained multi-period mean-variance portfolio selection problem within a market characterized by a dynamic factor model. This model captures predictability in asset returns driven by…

We extract firms' cyber risk with a machine learning algorithm measuring the proximity between their disclosures and a dedicated cyber corpus. Our approach outperforms dictionary methods, uses full disclosure and not devoted-only sections,…

According to theoretical models of valuing risky corporate securities, risk of default is primary component in overall yield spread. However, sizable empirical literature considers it otherwise by giving more importance to non-default risk…

The risk premia of traded factors are the sum of factor means and a parameter vector we denote by {\phi} which is identified from the cross section regression of alpha of individual securities on the vector of factor loadings. If phi is…

Discount is the difference between the face value of a bond and its present value. I propose an arbitrage-free dynamic framework for discount models, which provides an alternative to the Heath--Jarrow--Morton framework for forward rates. I…

Catastrophe (CAT) bond markets are incomplete and hence carry uncertainty in instrument pricing. As such various pricing approaches have been proposed, but none treat the uncertainty in catastrophe occurrences and interest rates in a…