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In this paper we explain the wild fluctuations of financial prices from the intrinsic amplifying feedback of speculative supply and demand. Formally, we show that an asset return follows a multiplicative random growth with exogenous input,…
We formulate a continuous-time competitive equilibrium model of irreversible capacity investment in which a continuum of heterogeneous producers supplies a single non-durable good subject to exogenous stochastic demand. Each producer…
We test for departures from normal and independent and identically distributed (NIID) returns, when returns under the alternative hypothesis are self-affine. Self-affine returns are either fractionally integrated and long-range dependent,…
The paper studies problem of continuous time optimal portfolio selection for a incom- plete market diffusion model. It is shown that, under some mild conditions, near optimal strategies for investors with different performance criteria can…
We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We…
This article clarifies the relationship between pricing kernel monotonicity and the existence of opportunities for stochastic arbitrage in a complete and frictionless market of derivative securities written on a market portfolio. The…
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…
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…
This paper investigates the financial economics of simple periodic systems. Well-established financial procedures appear to be complicated, and lead to partially biased results. Probability theory is applied, and the focus is on the…
Considering a simple economy, we derive a new Hamilton-Jacobi equation which is satisfied by the value of a ''bubble'' asset. We then show, by providing a rigorous mathematical analysis of this equation, that a unique non-zero stable…
The emph{securities market} is the fundamental theoretical framework in economics and finance for resource allocation under uncertainty. Securities serve both to reallocate risk and to disseminate probabilistic information. emph{Complete}…
We establish a quantitative version of the classical Halmos-Savage Theorem for convex, potentially non-dominated sets of probability measures and its dual counterpart, generalizing previous quantitative versions. These results are then used…
We study the range of prices at which a rational agent should contemplate transacting a financial contract outside a given securities market. Trading is subject to nonproportional transaction costs and portfolio constraints and full…
This paper examines the possibility of using derivative-implied risk premia to explain stock returns. The rapid development of derivative markets has led to the possibility of trading various kinds of risks, such as credit and interest rate…
The risk of financial positions is measured by the minimum amount of capital to raise and invest in eligible portfolios of traded assets in order to meet a prescribed acceptability constraint. We investigate nondegeneracy, finiteness and…
This paper presents an axiomatic scheme for interest rate models in discrete time. We take a pricing kernel approach, which builds in the arbitrage-free property and provides a link to equilibrium economics. We require that the pricing…
We consider a discrete-time model of a financial market where a risky asset is bought and sold with transactions having a transient price impact. It is shown that the corresponding utility maximization problem admits a solution. We manage…
Experimental results on market behavior establish a lower stability and efficiency of markets for durable re-tradable assets compared to markets for non-durable, or perishable, goods. In this chapter, we revisit this known but…
The investment risk minimization problem with budget and return constraints has been the subject of research using replica analysis but there are shortcomings in the extant literature. With respect to Tobin's separation theorem and the…
We study risk-sharing economies where heterogenous agents trade subject to quadratic transaction costs. The corresponding equilibrium asset prices and trading strategies are characterised by a system of nonlinear, fully-coupled…