Related papers: Behavioral Finance -- Asset Prices Predictability,…
Proponents of behavioral finance have identified several "puzzles" in the market that are inconsistent with rational finance theory. One such puzzle is the "excess volatility puzzle". Changes in equity prices are too large given changes in…
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…
The equity risk premium puzzle is that the return on equities has far exceeded the average return on short-term risk-free debt and cannot be explained by conventional representative-agent consumption based equilibrium models. We review a…
When pricing options, there may be different views on the instantaneous mean return of the underlying price process. According to Black (1972), where there exist heterogeneous views on the instantaneous mean return, this will result in…
We derive behavioral finance option pricing formulas consistent with the rational dynamic asset pricing theory. In the existing behavioral finance option pricing formulas, the price process of the representative agent is not a…
This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is…
The paper studies pricing of insurance products focusing on the pricing of annuities under uncertainty. This pricing problem is crucial for financial decision making and was studied intensively, however, many open questions still remain. In…
Volatility is the canonical measure of financial risk, a role largely inherited from Modern Portfolio Theory. Yet, its universality rests on restrictive efficiency assumptions that render volatility, at best, an incomplete proxy for true…
This paper investigates a novel behavioral feature of recursive preferences: aversion to risks that persist over time, or simply \textit{correlation aversion}. Greater persistence provides information about future consumption but reduces…
A rational bubble is a situation in which the asset price exceeds its fundamental value defined by the present discounted value of dividends in a rational equilibrium model. We discuss the recent development of the theory of rational…
This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors under all conditions, a new tool, that is, the…
Standard economic theory assumes that agents in markets behave rationally. However, the observation of extremely large fluctuations in the price of financial assets that are not correlated to changes in their fundamental value, as well as…
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…
Equity premium, the surplus returns of stocks over bonds, has been an enduring puzzle. While numerous prior works approach the problem assuming the utility of money is invariant across contexts, our approach implies that in efficient…
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…
Financial markets provide a natural quantitative lab for understanding some of the most advanced human behaviours. Among them is the use of mathematical tools known as financial instruments. Besides money, the two most fundamental financial…
In this paper, we revisit the equity premium puzzle reported in 1985 by Mehra and Prescott. We show that the large equity premium that they report can be explained by choosing a more appropriate distribution for the return data. We…
A range of empirical puzzles in finance has been explained as a consequence of traders being averse to ambiguity. Ambiguity averse traders can behave in financial portfolio problems in ways that cannot be rationalized as maximizing…
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…
This article provides a self-contained overview of the theory of rational asset price bubbles. We cover topics from basic definitions, properties, and classical results to frontier research, with an emphasis on bubbles attached to real…