Related papers: Asset Prices and Risk Aversion
Model approximations are common practice when estimating structural or quasi-structural models. The paper considers the econometric properties of estimators that utilize projections to reimpose information about the exact model in the form…
The classical discrete time model of proportional transaction costs relies on the assumption that a feasible portfolio process has solvent increments at each step. We extend this setting in two directions, allowing for convex transaction…
In this paper we present a theoretical framework for determining dynamic ask and bid prices of derivatives using the theory of dynamic coherent acceptability indices in discrete time. We prove a version of the First Fundamental Theorem of…
Equity markets have long been regarded as unpredictable, with intraday price movements treated as stochastic noise. This study challenges that view by introducing the Extended Samuelson Model (ESM), a natural science-based framework that…
Consider an insurance company exposed to a stochastic economic environment that contains two kinds of risk. The first kind is the insurance risk caused by traditional insurance claims, and the second kind is the financial risk resulting…
This paper examines a heterogeneous beliefs model in which there is a process that is only partially observed by the agents. The economy contains a risky asset producing dividends continuously in time. The dividends are observed by the…
We derive a closed-form expression capturing the degree of Relative Risk Aversion (RRA) of investors for non-"fair" lotteries. We argue that our formula is superior to earlier methods that have been proposed, as it is a function of only…
In this work we present an equilibrium formulation for price impacts. This is motivated by the Buhlmann equilibrium in which assets are sold into a system of market participants, e.g. a fire sale in systemic risk, and can be viewed as a…
The main goal of this paper is an application of Bayesian inference in testing the relation between risk and return on the financial instruments. On the basis of the Intertemporal CAPM model we built a general sampling model suitable in…
Large variations in stock prices happen with sufficient frequency to raise doubts about existing models, which all fail to account for non-Gaussian statistics. We construct simple models of a stock market, and argue that the large…
This paper examines the valuation and hedging of standard equity protection swap (EPS) products proposed by Xu et al.. To account for financial crises and counterparty default risk, we develop pricing frameworks based on Merton's…
We define and study a rather complex market model, inspired from the Santa Fe artificial market and the Minority Game. Agents have different strategies among which they can choose, according to their relative profitability, with the…
We study reserve prices in auctions with independent private values when bidders are expectations-based loss averse. We find that the optimal public reserve price excludes fewer bidder types than under risk neutrality. Moreover, we show…
Positive feedback trading, which buys when prices rise and sells when prices fall, has long been criticized for being destabilizing as it moves prices away from the fundamentals. Motivated by the relationship between positive feedback…
We provide a new foundation of risk aversion by showing that this attitude is fully captured by the propensity to seize insurance opportunities. Our foundation, which applies to all probabilistically sophisticated preferences, well accords…
We consider a financial market in which the risk-free rate of interest is modeled as a Markov diffusion. We suppose that home prices are set by a representative home-buyer, who can afford to pay only a fixed cash-flow per unit time for…
Building on a prominent agent-based model, we present a new structural stochastic volatility asset pricing model of fundamentalists vs. chartists where the prices are determined based on excess demand. Specifically, this allows for…
We consider a random financial network with a large number of agents. The agents connect through credit instruments borrowed from each other or through direct lending, and these create the liabilities. The settlement of the debts of various…
In this article, we investigate whether exchange rate risk is priced. We use a multivariate GARCH-in-Mean specification and test alternative conditional international CAPM versions. Our results support strongly the international…
This paper studies an asset pricing model in a partially observable market with a large number of heterogeneous agents using the mean field game theory. In this model, we assume that investors can only observe stock prices and must infer…