Related papers: Misspecified Recovery
The valuation process that economic agents undergo for investments with uncertain payoff typically depends on their statistical views on possible future outcomes, their attitudes toward risk, and, of course, the payoff structure itself.…
We show that the martingale component in the long-term factorization of the stochastic discount factor due to Alvarez and Jermann (2005) and Hansen and Scheinkman (2009) is highly volatile, produces a downward-sloping term structure of bond…
This paper extends the long-term factorization of the stochastic discount factor introduced and studied by Alvarez and Jermann (2005) in discretetime ergodic environments and by Hansen and Scheinkman (2009) and Hansen (2012) in Markovian…
We introduce a non-parametric method to recover physical probability distributions of asset returns based on their European option prices and some other sparse parametric information. Thus the main problem is similar to the one considered…
Stochastic discount factor (SDF) processes in dynamic economies admit a permanent-transitory decomposition in which the permanent component characterizes pricing over long investment horizons. This paper introduces an empirical framework to…
This paper develops a spectral theory of Markovian asset pricing models where the underlying economic uncertainty follows a continuous-time Markov process X with a general state space (Borel right process (BRP)) and the stochastic discount…
The current research on credit risk is primarily focused on modeling default probabilities. Recovery rates are often treated as an afterthought; they are modeled independently, in many cases they are even assumed constant. This is despite…
While asset-pricing models increasingly recognize that factor risk premia are subject to structural change, existing literature typically assumes that investors correctly account for such instability. This paper studies how investors…
We empirically test predictability on asset price by using stock selection rules based on maximum drawdown and its consecutive recovery. In various equity markets, monthly momentum- and weekly contrarian-style portfolios constructed from…
This review summarizes the historical development of probability measures in asset pricing, from early mathematical finance and state price theory to risk-neutral valuation, martingale measures, forward measures, stochastic discount…
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…
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…
Searching for new effective risk factors on stock returns is an important research topic in asset pricing. Factor modeling is an active research topic in statistics and econometrics, with many new advances. However, these new methods have…
A financial market model where agents trade using realistic combinations of buy-and-hold strategies is considered. Minimal assumptions are made on the discounted asset-price process - in particular, the semimartingale property is not…
While defaults are rare events, losses can be substantial even for credit portfolios with a large number of contracts. Therefore, not only a good evaluation of the probability of default is crucial, but also the severity of losses needs to…
Markov decision processes (MDPs) are the defacto frame-work for sequential decision making in the presence ofstochastic uncertainty. A classical optimization criterion forMDPs is to maximize the expected discounted-sum pay-off, which…
Identifying meaningful relationships between the price movements of financial assets is a challenging but important problem in a variety of financial applications. However with recent research, particularly those using machine learning and…
We explore a decomposition in which returns on a large class of portfolios relative to the market depend on a smooth non-negative drift and changes in the asset price distribution. This decomposition is obtained using general continuous…
The policy improvement bound on the difference of the discounted returns plays a crucial role in the theoretical justification of the trust-region policy optimization (TRPO) algorithm. The existing bound leads to a degenerate bound when the…
We revisit the classical Merton consumption--investment problem when risky-asset returns are modeled by stochastic differential equations interpreted through a general $\alpha$-integral, interpolating between It\^{o}, Stratonovich, and…