Asset Management

This article derives and evaluates estimates of the implied cost of equity capital of U.S. insurance companies. During most of the period December 1981 through January 2010, the monthly median implied equity risk premium ranged between 4% and 8%, with a time-series mean of 6.2%. However, during the financial crisis of 2008–2009, the equity premium reached unprecedented levels, exceeding 15% in November 2008.

This paper considers a model of (irreversible) investment under uncertainty for a firm facing external financing costs. Such a firm prefers to fund its investment through internal funds, so that thefirm's optimal investment policy and value now depend on the size of its retained earnings. We show that the standard real options results are significantly modified when there are external financing costs.

In August 2009 Marvel Entertainment considers a merger with the Walt Disney Company. If Marvel shareholders approve the deal, each Marvel shareholder will receive $30 in cash and 0.7452 shares of Disney per Marvel share, together worth $50 - or a 29 premium over Marvel's stock price at that point in time.

This paper studies the presence of hedge funds in the Chapter 11 process and their effects on bankruptcy outcomes. Hedge funds strategically choose positions in the capital structure where their actions could have a bigger impact on value. Their presence, especially as unsecured creditors, helps balance power between the debtor and secured creditors.

"Much of what we experience in life results from a combination of skill and luck." — From the Introduction

The trick, of course, is figuring out just how many of our successes (and failures) can be attributed to each — and how we can learn to tell the difference ahead of time.

This paper provides evidence of the real effects of financial markets. Using mutual fund redemptions as an instrument for price changes, we identify a strong effect of market prices on takeover activity (the "trigger effect"). An inter-quartile decrease in valuation leads to a 7 percentage point increase in acquisition likelihood, relative to a 6% unconditional takeover probability. Instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover (the "anticipation effect").

A growing literature suggests that even in the absence of any ability to predict returns, holding options on the benchmarks or trading frequently can generate positive alpha. The ratio of alpha to its tracking error appraises a fund's performance. This paper derives the performance-maximizing strategy, which turns out to be a variant of a buy-write strategy, and the least upper bound on such performance enhancement. If common equity indices are used as benchmarks, the potential alpha generated from trading frequently can be substantial in magnitude, but it carries considerable risk.

Beginning with Shimer (2005) and Hall(2005), a recent branch of the business cycle literature has explored the role of wage rigidity in accounting for the statistical characteristics of key labor market variables; in particular high vacancy and unemployment volatility and a high negative correlation between the two. As a further exploration, we extend the Mortensen-Pissarides structure of period-by-period Nash wage bargaining to an environment where there is labor force heterogeneity (permanently employed "insiders" and "outsiders" subject to separations) and limited asset market parti