Related papers: Leverage and Uncertainty
Equivariant models leverage prior knowledge on symmetries to improve predictive performance, but misspecified architectural constraints can harm it instead. While work has explored learning or relaxing constraints, selecting among…
Why do companies choose particular capital structures? A compelling answer to this question remains elusive despite extensive research. In this article, we use double machine learning to examine the heterogeneous causal effect of credit…
This paper synthesizes and analyzes some important current and recent contributions to the theory of the firm under uncertainty. In so doing, it examines the production and hedging decisions of the competitive firm under a single source and…
Financial metrics like the Sharpe ratio are pivotal in evaluating investment performance by balancing risk and return. However, traditional metrics often struggle with robustness and generalization, particularly in dynamic and volatile…
This paper tackles the challenge of detecting unreliable behavior in regression algorithms, which may arise from intrinsic variability (e.g., aleatoric uncertainty) or modeling errors (e.g., model uncertainty). First, we formally introduce…
Exploration is a significant challenge in practical reinforcement learning (RL), and uncertainty-aware exploration that incorporates the quantification of epistemic and aleatory uncertainty has been recognized as an effective exploration…
Portfolio diversification, traditionally measured through asset correlations and volatilitybased metrics, is fundamental to managing financial risk. However, existing diversification metrics often overlook non-numerical relationships…
This paper studies a risk-sensitive decision-making problem under uncertainty. It considers a decision-making process that unfolds over a fixed number of stages, in which a decision-maker chooses among multiple alternatives, some of which…
Diversification is usually viewed as a reliable way to reduce risk, yet it can dramatically fail for heavy-tailed losses with infinite mean: pooling independent losses of this type may increase tail risk at every threshold. We study this…
One purpose -- quite a few thinkers would say the main purpose -- of seeking knowledge about the world is to enhance our ability to make good decisions. An item of knowledge that can make no conceivable difference with regard to anything we…
The introduction of leverage on prediction-market event contracts raises three structurally distinct questions that have not been addressed jointly: how leverage changes manipulation incentives, how it interacts with informed-trading rents,…
A common assumption in financial engineering is that the market price for any derivative coincides with an objectively defined risk-neutral price - a plausible assumption only if traders collectively possess objective knowledge about the…
It is common knowledge that leverage can increase the potential returns of an investment, at the expense of increased risk. For a passive investor in the stock market, leverage can be achieved using margin debt or leveraged-ETFs. We perform…
This paper attempts to provide a decision-theoretic foundation for the measurement of economic tail risk, which is not only closely related to utility theory but also relevant to statistical model uncertainty. The main result is that the…
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…
In retrospect, the experimental findings on competitive market behavior called for a revival of the old, classical, view of competition as a collective higgling and bargaining process (as opposed to price-taking behaviors) founded on…
We consider games of chance played by someone with external capital that cannot be applied to the game and determine how this affects risk-adjusted optimal betting. Specifically, we focus on Kelly optimization as a metric, optimizing the…
We revisit the problem of portfolio selection, where an investor maximizes utility subject to a risk constraint. Our framework is very general and accommodates a wide range of utility and risk functionals, including non-concave utilities…
Many financial and economic variables, including financial returns, exhibit nonlinear dependence, heterogeneity and heavy-tailedness. These properties may make problematic the analysis of (non-)efficiency and volatility clustering in…
A step to consilience, starting with a deconstruction of the causality of uncertainty that is embedded in the fundamentals of growth and inequality, following a construction of aggregation laws that disclose the invariance principle across…