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The purpose of this paper is to use some of the contributions of the option pricing theory to solve three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle.

To approach the issue, this paper considers the applications of the option pricing theory to both sides of the corporate balance sheet. Applications to the left-hand side of the balance sheet has led to the real options theory that has expressed the value of a capital budgeting project as the sum of the values of its “discounted cash flow (DCF) method” and “real options.” This paper argues that, because the balance sheet must balance, the value of equity, which appears on the right-hand side of the balance sheet, should also be expressed as the sum of the values of its “DCF method” and “equity options.”

This proposed model of equity valuation solves the three outstanding puzzles in finance: the underdiversification puzzle, the volatility puzzle and the equity premium puzzle.

This study may not be able to explain the full extent of the three puzzles.

The dividend discount model of equity valuation needs to be augmented by an option component.

The community of finance scholars will become more confident of their scholarly work because three puzzles will be solved to a great extent.

To the best of author’s knowledge, the extant literature does not either solve any single one of the three puzzles through the contributions of option pricing theory or solve all three puzzles at the same time with a single solution. The originality of this paper is that it makes both of these contributions to the extant literature.

The purpose of this literature review paper is to define consumer finance, describe the scope of consumer finance and discuss its future research directions.

In this paper, consumer finance is used as a synonym of household finance. Consumers refer to individuals and families. After defining the term “consumer finance,” we conducted a critical review of consumer finance as an interdisciplinary research field in terms of money managing, insuring, borrowing and saving/investing. Future research directions are also discussed.

This paper discusses similarities and differences among several terms such as consumer finance, household finance, personal finance, family finance and behavioral finance. The paper also reviewed key studies on consumer financial behavior around four key financial functions, namely, money management, insurance, loan and saving/investment and several nontraditional topics such as fintech and financial capability/literacy. The paper also introduced several datasets of consumer finance commonly used in the United States and China.

This paper clarified several similar terms related to consumer finance and sorted out the diverse literature of consumer finance in multiple disciplines such as economics, finance and consumer science, which provide a foundation for generating more fruitful research in consumer finance in the future.

This study empirically documents the effect of ambiguity on stock returns in a major emerging market along with the ambiguity attitudes under various market conditions.

Ambiguity is measured as the volatility of return probability distributions extracted from high frequency intraday data via a method developed by Brenner and Izhakian (2018). The impact of ambiguity is then tested on stock market returns.

The results show that ambiguity is a priced factor in Turkish stock market with a positive premium that is distinct from risk premium. In contrast with the findings in the US market, the investors in Turkey show an increasing level of ambiguity aversion as expected probability of favorable returns deviate from the mean value. The investors are effectively ambiguity neutral in lateral markets. The results are robust to testing with higher moments, sentiment measures and under recession conditions.

This study contributes to empirically documenting ambiguity and ambiguity aversion in a major emerging market along with the opportunity to observe international differences in ambiguity attitudes.

The authors aim to examine the relationship between home bias and globalization while specifically examining the effects of the different dimensions of globalization (social, economic and political) for both developed countries and developing countries. Additionally, the authors test the effect of globalization regulation and laws against actual globalization activities.

This study investigates the influence of globalization on the home bias phenomenon using a panel regression and a three-dimensional globalization index (social, economic and political globalization) of 42 developed and developing countries from 2001 to 2016.

The results show that globalization significantly reduces home bias. In addition, the authors find that social globalization has a key influence compared to economic globalization and that political globalization has the weakest effect. For developing economies only, economic globalization as well as globalization laws and regulations have a crucial impact on the level of home bias.

Prior studies focus merely on the aspect of financial integration. Our study provides a more comprehensive outlook by distinguishing between the features of globalization (social, economic and political) as well as the actual globalization activities (de facto) compared to the laws and regulations enabling those actives (de jure). Lauterbach and Reisman (2004) show that globalization reduces home bias through a theoretical model. This study provides empirical merit to their work. In addition, we examine the different aspects of globalization for both emerging and developed markets.

In this study, we investigate what drives the MAX effect in the South Korean stock market. We find that the MAX effect is significant only for overpriced stocks categorized by the composite mispricing index. Our results suggest that investors' demand for the lottery and the arbitrage risk effect of MAX may overlap and negate each other. Furthermore, MAX itself has independent information apart from idiosyncratic volatility (IVOL), which assures that the high positive correlation between IVOL and MAX does not directly cause our empirical findings. Finally, by analyzing the direct trading behavior of investors, our results suggest that investors' buying pressure for lottery-like stocks is concentrated among overpriced stocks.

In the presence of capital market imperfections, risk management at the enterprise level is apt to increase the firm's value to shareholders by reducing costs associated with agency conflicts, external financing, financial distress, and taxes. The purpose of this paper is to provide an accessible and comprehensive account of these rationales for corporate risk management and to give a short overview of the empirical support found in the literature.

The paper outlines the main theories suggesting that corporate risk management can enhance shareholder value and briefly reviews the empirical evidence on these theories.

When there are imperfections in capital markets, corporate hedging can enhance shareholder value through its impact on agency costs, costly external financing, direct and indirect costs of bankruptcy, as well as taxes. More specifically, corporate hedging can alleviate underinvestment and asset substitution problems by reducing the volatility of cash flows, and it can accommodate the risk aversion of undiversified managers and increase the effectiveness of managerial incentive structures through eliminating unsystematic risk. Lower volatility of cash flows also leads to lower bankruptcy costs. Moreover, corporate hedging can also align the availability of internal resources with the need for investment funds, helping firms to avoid costly external financing. Finally, corporate risk management can reduce the corporate tax burden in the presence of convex tax schedules. While there is empirical support for these rationales of hedging at the firm level, the evidence is only modestly supportive, suggesting alternative explanations.

The discussed theories and the empirical evidence are described in an accessible way, in part by using numerical examples.

The purpose of this paper is to investigate whether downside-risk measures help to explain why households largely refrain from investing in Exchange Traded Funds that replicate broad and internationally diversified market indices, so-called XTFs, although studies frequently recommend to do so.

The paper analyzes whether evaluating risk in terms of downside-risk measures which reflect households' interpretation of risk closer than the standard deviation (SD) of returns, yields less risk-return-enhancements, and thus, fewer incentives for households to invest in XTFs. Household portfolios are compiled by combining stylized portfolio compositions that involve multiple asset classes and German households' security holdings. The data set covers the period from January 2014 to December 2016 and includes 47,388 securities.

The results indicate that none of the downside-risk measures can help to explain the reluctance of households to invest in XTFs. On the flip side, the results show that all stylized household portfolios can enhance the risk-return position from employing XTFs, regardless of the underlying risk measure. This supports the advice to invest in XTFs and extends it upon households that evaluate risk in terms of downside-risk.

To the best of the authors' knowledge, this study is the first to investigate risk-return-enhancements from XTFs while simultaneously considering various downside-risk measures and multiple asset classes of household portfolios.

The study aims to test prospect theory (PT) predictions in the cryptocurrency (CC) market. It proposes a new asset pricing model that explores the potential of prospect theory value (PTV) as a significant predictor of CC returns.

The study comprehensively analyses a large sample set of 1,629 CCs, representing more than 95% of the CC market. The study uses a portfolio analysis approach, employing univariate and bivariate sorting techniques with equal-weighted and value-weighted portfolios. The study also employs ordinary least squares (OLS) regression, panel data methods and quantile regression (QR) to estimate the models.

This study demonstrates an average inverse relationship between PTV and CC returns. However, this relationship exhibits asymmetry across different quantiles, indicating that investor reactions vary based on market conditions. Moreover, PTV provides more robust predictions for smaller CCs characterized by high volatility and illiquidity. Notably, the findings highlight the dominant role of the probability weighting (PW) component in PT for predicting CC behaviors, suggesting a preference for lottery-like characteristics among CC investors.

The study is one of the early studies on CC price dynamics from the PT perspective. The study is the first to apply a QR approach to analyze the cross-section of CCs using a PT-based asset pricing model. The results shed light on CC investors' decision-making processes and risk perception, offering valuable insights to regulators, policymakers and market participants. From a practical perspective, a trading strategy centered around the PTV effect can be implemented.

This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.

This paper proposes a gambling activity measure by jointly considering open interest and moneyness of out-of-the-money (OTM) individual equity call options.

The new measure, CallMoney, captures excessive optimism during the dot-com bubble, the oil price bubble and the pre-GFC stock market bubble. CallMoney robustly and negatively predicts both OTM and at-the-money call option returns cross-sectionally. The option return predictability of CallMoney is stronger when stock price is further from its 52-weeks high, capital gains overhang is lower, and when information uncertainty of the underlying stock is higher. CallMoney also robustly and negatively predicts cross-sectional stock returns.

The gambling measure has the advantages of being economically intuitive, model-free, easy to measure. The measure performs more robustly than existing lottery measures with respect to option and stock return predictability and more reliably captures the overpricing of options and stocks. The work helps understanding the gambling related anomalies in equity option returns and stock returns.

This paper investigates the role of economic disagreement in the cross-sectional pricing of individual stocks. Economic disagreement is quantified with ex ante measures of cross-sectional dispersion in economic forecasts from the Survey of Professional Forecasters (SPF), determining the degree of disagreement among professional forecasters over changes in economic fundamentals.

The authors introduce a broad index of economic disagreement based on the innovations in the cross-sectional dispersion of economic forecasts for output, inflation and unemployment so that the index is a shock measure that captures different aspects of disagreement over economic fundamentals and also reflects unexpected news or surprise about the state of the aggregate economy. After building the broad index of economic disagreement, the authors test out-of-sample performance of the index in predicting the cross-sectional variation in future stock returns.

Univariate portfolio analyses indicate that decile portfolios that are long in stocks with the lowest disagreement beta and short in stocks with the highest disagreement beta yield a risk-adjusted annual return of 7.2%. The results remain robust after controlling for well-known pricing effects. The results are consistent with a preference-based explanation that ambiguity-averse investors demand extra compensation to hold stocks with high disagreement risk and the investors are willing to pay high prices for stocks with large hedging benefits. The results also support the mispricing hypothesis that the high disagreement beta provides an indirect way to measure dispersed opinion and overpricing.

Most literature measures disagreement about individual stocks with the standard deviation of earnings forecasts made by financial analysts and examines the cross-sectional relation between this measure and individual stock returns. Unlike prior studies, the authors focus on disagreement about the economy instead of disagreement about earnings growth. The authors' argument is that disagreement about the economy is a major factor that would explain disagreement about stock fundamentals. The authors find that disagreement in economic forecasts does indeed have a significant impact on the cross-sectional pricing of individual stocks.