Related papers: Getting rich quick with the Axiom of Choice
We explain the main concepts of Prospect Theory and Cumulative Prospect Theory within the framework of rational dynamic asset pricing theory. We derive option pricing formulas when asset returns are altered with a generalized Prospect…
In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for…
Cover's celebrated theorem states that the long run yield of a properly chosen "universal" portfolio is as good as the long run yield of the best retrospectively chosen constant rebalanced portfolio. The "universality" pertains to the fact…
We find the optimal investment strategy to minimize the expected time that an individual's wealth stays below zero, the so-called {\it occupation time}. The individual consumes at a constant rate and invests in a Black-Scholes financial…
This paper develops a mathematical framework for the analysis of continuous-time trading strategies which, in contrast to the classical setting of continuous-time mathematical finance, does not rely on stochastic integrals or other…
How should a buyer design procurement mechanisms when suppliers' costs are unknown, and the buyer does not have a prior belief? We demonstrate that simple mechanisms - that share a constant fraction of the buyer utility with the seller -…
Prize linked savings accounts provide a return in the form of randomly chosen accounts receiving large cash prizes, in lieu of a guaranteed and uniform interest rate. This model became legal for American national banks upon bipartisan…
For those concerned with the long-term value of their accounts, it can be a challenge to plan in the present for inflation-adjusted economic growth over coming decades. Here, I argue that there exists an economic constant that carries…
Pricing financial or real options with arbitrary payoffs in regime-switching models is an important problem in finance. Mathematically, it is to solve, under certain standard assumptions, a general form of optimal stopping problems in…
We introduce a natural generalization of the forward-starting options, first discussed by M. Rubinstein. The main feature of the contract presented here is that the strike-determination time is not fixed ex-ante, but allowed to be random,…
We introduce a new method to calculate the credit exposure of European and path-dependent options. The proposed method is able to calculate accurate expected exposure and potential future exposure profiles under the risk-neutral and the…
This paper studies an equity market of stochastic dimension, where the number of assets fluctuates over time. In such a market, we develop the fundamental theorem of asset pricing, which provides the equivalence of the following statements:…
The original Kelly criterion provides a strategy to maximize the long-term growth of winnings in a sequence of simple Bernoulli bets with an edge, that is, when the expected return on each bet is positive. The objective of this work is to…
Social scientists have long sought to understand why certain people, items, or options become more popular than others. One seemingly intuitive theory is that inherent value drives popularity. An alternative theory claims that popularity is…
We determine the optimal strategies for purchasing term life insurance and for investing in a risky financial market in order to maximize the probability of reaching a bequest goal while consuming from an investment account. We extend…
In this paper, we investigate a financial market model consisting of a risky asset, modeled as a general diffusion parameterized by a scale function and a speed measure, and a bank account process with a constant interest rate. This…
Many economic theories have been introduced over the course of history to articulate our understanding of the economy. Classical theories by Adam Smith and David Ricardo's Comparative Advantage have been foundational for the last century's…
A stochastic model with a continuum of economic agents often involves shocks at both macro and micro levels. This can be formalized by a continuum of random variables that are conditionally independent given the macro level shocks. Based on…
We propose that predictability is a prerequisite for profitability on financial markets. We look at ways to measure predictability of price changes using information theoretic approach and employ them on all historical data available for…
We obtain option pricing formulas for stock price models in which the drift and volatility terms are functionals of a continuous history of the stock prices. That is, the stock dynamics follows a nonlinear stochastic functional differential…