Related papers: The puzzle that just isn't
The existence of the pricing kernel is shown to imply the existence of an ambient information process that generates market filtration. This information process consists of a signal component concerning the value of the random variable X…
Among the three cosmological enigma solved by the theory of inflation, {\it viz.} (a) large scale flatness, (b) absence of monopoles and strings, and (c) structure formation, the first two are addressed from the viewpoint of the observed…
This paper examines the empirical failure of uncovered interest parity (UIP) and proposes a structural explanation based on a mean-reverting risk premium. We define a realized premium as the deviation between observed exchange rate returns…
The currency carry trade is the investment strategy that involves selling low interest rate currencies in order to purchase higher interest rate currencies, thus profiting from the interest rate differentials. This is a well known financial…
Voluntary insurance contracts constitute a puzzle because they increase the expectation value of one party's wealth, whereas both parties must sign for such contracts to exist. Classically, the puzzle is resolved by introducing non-linear…
This paper testifies to the fact that the independence of the Central Banks, as stated by its founding fathers, is nothing more than a chimera. We demonstrate that the hypothesis inflation is a purely monetary phenomenon does not support…
Classic inflation, the theory described in textbooks, is based on the idea that, beginning from typical initial conditions and assuming a simple inflaton potential with a minimum of fine-tuning, inflation can create exponentially large…
The condition for stationary increments, not scaling, detemines long time pair autocorrelations. An incorrect assumption of stationary increments generates spurious stylized facts, fat tails and a Hurst exponent H_s=1/2, when the increments…
A central problem of Quantitative Finance is that of formulating a probabilistic model of the time evolution of asset prices allowing reliable predictions on their future volatility. As in several natural phenomena, the predictions of such…
We solve in closed-form an equilibrium model in which a finite number of exponential investors continuously consume and trade with price-impact. Compared to the analogous Pareto-efficient equilibrium model, price-impact has an amplification…
Although the inflationary paradigm is the most widely accepted explanation for the current cosmological observations, it does not necessarily correspond to what actually happened in the early stages of our Universe. To decide on this issue,…
This study provides the solution to the equity premium puzzle. The new model was developed by including the behavior of investors toward risk in financial markets in prior studies. The calculations of this newly tested model show that the…
We analyze the main arguments that attempt to explain why there is no point in changing the envelope. Most people confuse estimation and calculation, conditional and unconditional probabilities, random and non-random variables, modelling…
We present a nonsingular scenario in which an inflation era goes after a bounce from a contracting scenario in the early universe. The contracting of the universe is supposed to be slow, such that the initial anisotropies will not grow too…
A minimal central bank credibility, with a non-zero probability of not renegning his commitment ("quasi-commitment"), is a necessary condition for anchoring inflation expectations and stabilizing inflation dynamics. By contrast, a complete…
Deviations from Gaussian statistics of the cosmological density fluctuations, so-called primordial non-Gaussianities (NG), are one of the most informative fingerprints of the origin of structures in the universe. Indeed, they can probe…
The phenomenology of the forward rate curve (FRC) can be accurately understood by the fluctuations of a stiff elastic string (Le Coz and Bouchaud, 2024). By relating the exogenous shocks driving such fluctuations to the surprises in the…
In a model with no given probability measure, we consider asset pricing in the presence of frictions and other imperfections and characterize the property of coherent pricing, a notion related to (but much weaker than) the no arbitrage…
A theoretical self-sustainable economic model is established based on the fundamental factors of production, consumption, reservation and reinvestment, where currency is set as a unconditional credit symbol serving as transaction equivalent…
Asset price bubbles are situations where asset prices exceed the fundamental values defined by the present value of dividends. This paper presents a conceptually new perspective: the necessity of bubbles. We establish the Bubble Necessity…