Related papers: Stochastic discount factors
We analyze the relative price change of assets starting from basic supply/demand considerations subject to arbitrary motivations. The resulting stochastic differential equation has coefficients that are functions of supply and demand. We…
We consider a model where an agent has a repeated decision to make and wishes to maximize their total payoff. Payoffs are influenced by an action taken by the agent, but also an unknown state of the world that evolves over time. Before…
In this paper, we introduce a model that adds a non-linearity to discounting: the discounting factor may depend on the notional (i.e., discounted values are no longer linear in the notional). In the first part of the paper, we provide a…
In the information-based approach to asset pricing the market filtration is modelled explicitly as a superposition of signals concerning relevant market factors and independent noise. The rate at which the signal is revealed to the market…
We investigate how the choice of decision makers can be varied under the presence of risk and uncertainty. Our analysis is based on the approach we have previously applied to individual decision makers, which we now generalize to the case…
Different agents need to make a prediction. They observe identical data, but have different models: they predict using different explanatory variables. We study which agent believes they have the best predictive ability -- as measured by…
When decision makers evaluate a sequence of rewards, they may pay more attention to larger rewards and, given attention is limited, less attention to smaller rewards. They may also become less attentive to each reward when attention is…
People often face trade-offs between costs and benefits occurring at various points in time. The predominant discounting approach is to use the exponential form. Central to this approach is the discount rate, a unique parameter that…
Asset prices contain information about the probability distribution of future states and the stochastic discounting of those states as used by investors. To better understand the challenge in distinguishing investors' beliefs from…
This paper studies a risk-sensitive decision-making problem under uncertainty. It considers a decision-making process that unfolds over a fixed number of stages, in which a decision-maker chooses among multiple alternatives, some of which…
A new framework for asset price dynamics is introduced in which the concept of noisy information about future cash flows is used to derive the price processes. In this framework an asset is defined by its cash-flow structure. Each cash flow…
A speculative agent with Prospect Theory preference chooses the optimal time to purchase and then to sell an indivisible risky asset to maximize the expected utility of the round-trip profit net of transaction costs. The optimization…
We explore the effect of discounting and experimentation in a simple model of interacting adaptive agents. Agents belong to either of two types and each has to decide whether to participate a game or not, the game being profitable when…
This essay discusses the advantages of a probabilistic agent-based approach to questions in theoretical economics, from the nature of economic agents, to the nature of the equilibria supported by their interactions. One idea we propose is…
This paper studies a continuous-time market {under stochastic environment} where an agent, having specified an investment horizon and a target terminal mean return, seeks to minimize the variance of the return with multiple stocks and a…
We present analytical investigations of a multiplicative stochastic process that models a simple investor dynamics in a random environment. The dynamics of the investor's budget, $x(t)$, depends on the stochasticity of the return on…
Changes in market conditions present challenges for investors as they cause performance to deviate from the ranges predicted by long-term averages of means and covariances. The aim of conditional asset allocation strategies is to overcome…
We consider a sequential decision making process, such as renewable energy trading or electrical production scheduling, whose outcome depends on the future realization of a random factor, such as a meteorological variable. We assume that…
Most decision theories, including expected utility theory, rank dependent utility theory and cumulative prospect theory, assume that investors are only interested in the distribution of returns and not in the states of the economy in which…
Evaluating the financial performance of manufacturing firms requires consideration of both the time value of money and the relative importance of multiple decision criteria. Conventional approaches relying solely on deterministic…