We show that reaching for yield -- a tendency to take more risk when the real interest rate declines while the risk premium remains constant -- results from imposing a sustainable spending constraint on an otherwise standard infinitely lived investor with power utility. This is true for two alternative versions of the constraint which make wealth and consumption follow martingales in levels or in logs, respectively. Reaching for yield intensifies when the interest rate is initially low, helping to explain the salience of the topic in the current low-rate environment. The sustainable spending constraint also affects the response of risktaking to a change in the risk premium, which can even be negative when the riskless interest rate is sufficiently low. In a variant of the model where the sustainable spending constraint is formulated in nominal terms, low inflation also encourages risktaking.

This paper builds a bridge between the real decision of firms and prices of equity options. Traditional option pricing literature proposed a variety of reduced form models to fit empirical patterns in option prices. At the same time, the cross sectional effects of firm fundamentals on equity options have not been thoroughly explored. I document a heterogeneous effect of firm fundamentals such as market-to-book on the relative prices of options that varies with the aggregate state of the economy. When the economy is booming, high market-to-book is associated with larger implied volatility skew and is predictive of negatively skewed return distribution. I develop a stylized continuous time production based asset pricing model with real options consistent with this evidence. To match the empirical evidence not only qualitatively but quantitatively as well, I solve a rich dynamic structural model and show that it can fit the empirical moments under countercyclical volatility and a high degree of capital adjustment costs asymmetry. Building further on the continuous time model and the endogenous variance risk premium it generates, I show that it can rationalize recently proposed delta-hedged option strategies based on profitability and book-to-market.

We study the stability of factor structure by analyzing its variation on different market events. We start by documenting variation in distributions, means, volatilities, and correlations, in a set of characteristics managed long-short portfolios on the weeks with large market movements, leading earnings announcements, and FOMC announcements with unexpected shocks to interest rates. This variation manifests in differences in factors extracted using characteristics based on statistical methods that we document using Instrumented PCA. The factor structure shows variation in the factor loadings and in the distribution of factors itself. We propose two ways of capturing event-specific variation in the factor structure. The first method, Treatment-IPCA, estimates orthogonal factors specific to the events we consider. We find significant premia associated with the treatment factors. The second method, Boosted-IPCA allows us to test the differential importance of firm characteristics in describing the cross-section of stock returns on market events relative to base periods.

We use a model free option based measure of jump risk to estimate jump risk in the cross section of stocks. We show that the exposure to average cross-sectional jump intensity is priced in the cross-section of stock returns. This relationship is stronger than for exposure to S&P jump intensity. We show that companies with higher exposure to average jump intensity not only have low stock returns but also experience a fall in profitability and investments during the GFC. We show that the proposed measure loads on large jumps. We, therefore, link our measure to macro-finance literature and showing that time series movements of jump intensity are inconsistent with baseline variable disaster risk models and, in particular, imply a significantly lower risk premium.