This article presents a model that incorporates habit formation and long-run risks into the Epstein–Zin preferences, and reveals intertemporal substitution as a distinctive channel, separate from risk aversion, in generating key asset market phenomena. With habit formation, both the risk aversion and intertemporal substitution channels enhance the market price of short-run consumption risk. With long-run risks, intertemporal substitution reduces the market prices of long-run consumption risks, working against risk aversion. The contrasting effects of the intertemporal substitution channel drive key differences in the model implications of habit formation and long-run risks.

Does speculative trade reduce mispricing and help create efficient markets or does it drive prices further from fundamentals? We analyze betting exchange trading on 9,562 UK horse races in 2013 and 2014 to find out. Crucially, as each race is run, the fundamental value of bets is unambiguously revealed. We find that the volume of trade is predictive of fundamentals, suggesting that speculative trade is on average conducive to market efficiency. However, much of this effect is concentrated in the in-running period during races when, even without trade, asset fundamentals would be revealed seconds later.

Relatively little is known about the empirical performance of infinite-activity Lévy jump models, especially with non-affine volatility dynamics. We use extensive empirical data sets to study how infinite-activity Variance Gamma and Normal Inverse Gaussian (NIG) jumps with affine and non-affine volatility dynamics improve goodness of fit and option pricing performance. With Markov Chain Monte Carlo, different model specifications are estimated using the joint information of the S&P 500 index and the VIX. Our article provides clear evidence that a parsimonious non-affine model with NIG return jumps and a linear variance specification is particularly competitive, even during the recent crisis.

We investigate the joint optimal risk management and capital structure decisions of banks when they use contingent-convertible (CoCo) futures contracts to hedge financial-sector risk. In spite of banks choosing significantly higher leverage ratios, their default probabilities drop appreciably while their equity values increase, allowing banks to compete more favorably with the shadow-banking system. Banks’ value-maximizing decision to hedge financial-sector risk unintentionally leads to an economy with extremely low aggregate bank default rates across all future states of nature. Thus, CoCo futures offer a powerful microprudential and macroprudential policy tool. That banks choose not to hedge financial-sector risk in practice is consistent with managers internalizing bank bailouts.

The tax rate on capital gains of equity has varied substantially over time and correlates negatively with realized capital gains and tax revenue. In our model, investors who anticipate the dynamics of the tax rate in their bond–equity mix realize greater gains when realized equity returns are higher, the capital gains tax rate is lower, and capital losses carried forward are larger. Simulating a calibrated population of investors produces model data consistent with tax revenue from capital gains realizations. Our model can inform the policymaker’s choice of the capital gains tax rate.

In capital-intensive industries, firms face complicated multi-staged financing, investment, and production decisions under the watchful eye of existing and potential industry rivals. In various representations of this environment, we show that a first-mover advantage in debt weakly dominates a first-mover advantage in capacity. Without a first-mover advantage in debt, the incumbent may suffer a dead-weight loss. When both the entrant and incumbent deploy debt prior to capacity, a first-mover in capacity benefits from softer competition. With a long-purse debt cost, leading in debt still remains advantageous.

We study the role of logistics information in the stock price discovery process. Using a proprietary dataset on parcel-level express delivery service records from one of the largest express service providers in China, we find that express delivery contains firm-specific information for stock pricing. A long/short portfolio of buying (selling) stocks with high (low) quarterly growth in the number of parcels sent by firms generates an 8.23 percent risk-adjusted annual return. The return predictability is more significantly driven by document, light, and business-to-business parcels, which reflects the intensity of a firm’s overall operations (rather than just sales growth), and by parcels sent to new addresses, which represents new business expansion. Echoing this return predictability, parcel growth also predicts firm growth, profitability, and earnings surprises. Finally, we provide evidence on return predictability associated with topology of logistic network identified by parcel delivery data.

We test whether measures of influence on regulators affect stress-test outcomes. The large trading banks—those most plausibly Too Big to Fail—face the toughest tests. Supervisory stress tests have a greater effect on large trading banks’ portfolios; the large banks respond by making more conservative (initial) capital plans; and, despite their more conservative capital plans, the large banks still fail their tests more frequently than other banks. In contrast, while we find little evidence that political or regulatory connections affect the quantitative element of the stress tests, these connected banks do face less scrutiny under its qualitative dimension.

By analyzing a hand-collected transaction-level dataset on the finance leases of China’s public firms for the period 2007–19, this article sheds light on China’s leasing market, the second largest in the world. We find that banks use their affiliated leasing firms to provide credit to clients in order to circumvent the government’s targeted credit tightening policy. In contrast to conventional view of regulatory arbitrage, our evidence shows that, rather than hiding risk and gambling for profit, banks-affiliated leasing firms have prudent risk control and efficient pricing. These bank-affiliated institutions are used by banks to play strategic role in relationship banking. Moreover, the ownership of the lessor also matters for the financing choice of the lessee.

In this article, we study the transition risk spillover among six major financial markets from 2013 to 2021. The USA is the main transition risk contributor, while Japan and China are the net risk receivers. Risk spillover may change over time and change according to different types of transition risk shocks. It takes around 6 weeks for transition risks to be fairly transmitted. On average, around 50% of local climate shocks to a given financial market originate from other markets. Transmission channels include the transmission of information and the economic connections between countries.