Related papers: Equity Premium Puzzle or Faulty Economic Modelling…

The aim of this short note is to present a solution to the discrete time exponential utility maximization problem in a case where the underlying asset has a multivariate normal distribution. In addition to the usual setting considered in…

This paper investigates well posedness of utility maximization problems for financial markets where stock returns depend on a hidden Gaussian mean reverting drift process. Since that process is potentially unbounded, well posedness cannot…

Based on a faithful representation of the heavy tail multivariate distribution of asset returns introduced previously (Sornette et al., 1998, 1999) that we extend to the case of asymmetric return distributions, we generalize the return-risk…

We revisit the classic paper of Tirole "Asset Bubbles and Overlapping Generations" (1985, Econometrica), which shows that the emergence of asset bubbles solves the capital over-accumulation problem. While Tirole's main insight holds with…

We investigate entropy as a financial risk measure. Entropy explains the equity premium of securities and portfolios in a simpler way and, at the same time, with higher explanatory power than the beta parameter of the capital asset pricing…

Different models of capital exchange among economic agents have been proposed recently trying to explain the emergence of Pareto's wealth power law distribution. One important factor to be considered is the existence of risk aversion. In…

In this paper we derive the exact solution of the multi-period portfolio choice problem for an exponential utility function under return predictability. It is assumed that the asset returns depend on predictable variables and that the joint…

In this paper, we consider the problem of maximizing the expected discounted utility of dividend payments for an insurance company that controls risk exposure by purchasing proportional reinsurance. We assume the preference of the insurer…

We consider the classical multi-asset Merton investment problem under drift uncertainty, i.e. the asset price dynamics are given by geometric Brownian motions with constant but unknown drift coefficients. The investor assumes a prior drift…

We consider a Markov chain approximation scheme for utility maximization problems in continuous time, which uses, in turn, a piecewise constant policy approximation, Euler-Maruyama time stepping, and a Gauss-Hermite approximation of the…

We discuss the economic reasons why the predictions of price and return statistical moments in the coming decades, in the best case, will be limited by their averages and volatilities. That limits the accuracy of the forecasts of price and…

By decomposing asset returns into potential maximum gain (PMG) and potential maximum loss (PML) with price extremes, this study empirically investigated the relationships between PMG and PML. We found significant asymmetry between PMG and…

For many households, investing for retirement is one of the most significant decisions and is fraught with uncertainty. In a classic study in behavioral economics, Benartzi and Thaler (1999) found evidence using bar charts that investors…

We construct the term structure of the (forward-looking, US market) equity risk premium from SPX option chains. The method is "model-light". Risk-neutral probability densities are estimated by fitting $N$-component Gaussian mixture models…

This paper develops a dynamic equilibrium model of the insurance market that jointly characterizes insurers' underwriting, investment, recapitalization, and dividend policies under model uncertainty and financial frictions. Competitive…

Behavioral Finance has become a challenge to the scientific community. Based on the assumption that behavioral aspects of investors may explain some features of the Stock Market, we propose an agent based model to study quantitatively this…

We consider the estimation of the multi-period optimal portfolio obtained by maximizing an exponential utility. Employing Jeffreys' non-informative prior and the conjugate informative prior, we derive stochastic representations for the…

The dynamic hedging theory only makes sense in the setup of one given model, whereas the practice of dynamic hedging is just the opposite, with models fleeing after the data through daily recalibration. This is quite of a quantitative…

Market timing is an investment technique that tries to continuously switch investment into assets forecast to have better returns. What is the likelihood of having a successful market timing strategy? With an emphasis on modeling…

Limited liability creates a conflict of interests between policyholders and shareholders of insurance companies. It provides shareholders with incentives to increase the risk of the insurer's assets and liabilities which, in turn, might…