Related papers: Sufficiency on the Stock Market
Four problems related to information divergence measures defined on finite alphabets are considered. In three of the cases we consider, we illustrate a contrast which arises between the binary-alphabet and larger-alphabet settings. This is…
This paper investigates two mechanisms of financial contagion that are, firstly, the correlated exposure of banks to the same source of risk, and secondly the direct exposure of banks in the interbank market. It will consider a random…
Classical mean-variance portfolio theory tells us how to construct a portfolio of assets which has the greatest expected return for a given level of return volatility. Utility theory then allows an investor to choose the point along this…
We examine the problem of optimal portfolio allocation within the framework of utility theory. We apply exponential utility to derive the optimal diversification strategy and logarithmic utility to determine the optimal leverage. We enhance…
As financial instruments grow in complexity more and more information is neglected by risk optimization practices. This brings down a curtain of opacity on the origination of risk, that has been one of the main culprits in the 2007-2008…
We consider a two-person trading game in continuous time whereby each player chooses a constant rebalancing rule $b$ that he must adhere to over $[0,t]$. If $V_t(b)$ denotes the final wealth of the rebalancing rule $b$, then Player 1 (the…
The quest for understanding the complex phenomena of the world has led to the development of various fields of science, each with its own methods, models, and assumptions. However, sometimes these fields can intersect and inspire each…
We introduce the "relative diffuseness" assumption to characterize the differences between payoff-relevant and strategy-relevant diffuseness of information. Based on this assumption, the existence of pure strategy equilibria in games with…
A growing body of literature in networked systems research relies on game theory and mechanism design to model and address the potential lack of cooperation between self-interested users. Most game-theoretic models applied to system…
This paper presents an approach for developing the explanation capabilities of rule-based expert systems managing imprecise and uncertain knowledge. The treatment of uncertainty takes place in the framework of possibility theory where the…
In a prediction market, individuals can sequentially place bets on the outcome of a future event. This leaves a trail of personal probabilities for the event, each being conditional on the current individual's private background knowledge…
We investigate an optimal investment problem with a general performance criterion which, in particular, includes discontinuous functions. Prices are modeled as diffusions and the market is incomplete. We find an explicit solution for the…
The expected utility hypothesis is a popular concept in economics that is useful for making decisions when the payoff is uncertain. In this paper, we investigate the implications of a fluctuation theorem in the theory of expected utility.…
In this paper, we address one of the main puzzles in finance observed in the stock market by proponents of behavioral finance: the stock predictability puzzle. We offer a statistical model within the context of rational finance which can be…
We pursue an inverse approach to utility theory and consumption & investment problems. Instead of specifying an agent's utility function and deriving her actions, we assume we observe her actions (i.e. her consumption and investment…
In this paper, we consider a simple discrete-time optimal betting problem using the celebrated Kelly criterion, which calls for maximization of the expected logarithmic growth of wealth. While the classical Kelly betting problem can be…
The article presents calculations that prove practical importance of the earlier derived theoretical relationship between the interest rate on the interbank credit market, volume of investment and the quantity of securities tradable on the…
Estimating and controlling large risks has become one of the main concern of financial institutions. This requires the development of adequate statistical models and theoretical tools (which go beyond the traditionnal theories based on…
Symmetry of information establishes a relation between the information that x has about y (denoted I(x : y)) and the information that y has about x (denoted I(y : x)). In classical information theory, the two are exactly equal, but in…
In this paper, we consider a financial market with assets exposed to some risks inducing jumps in the asset prices, and which can still be traded after default times. We use a default-intensity modeling approach, and address in this…