Related papers: Zero-Leverage Puzzle
One of the crucial problems in mathematical finance is to mitigate the risk of a financial position by setting up hedging positions of eligible financial securities. This leads to focusing on set-valued maps associating to any financial…
Based on a criterium of mathematical simplicity and consistency with empirical market data, a stochastic volatility model has been obtained with the volatility process driven by fractional noise. Depending on whether the stochasticity…
When trading incurs proportional costs, leverage can scale an asset's return only up to a maximum multiple, which is sensitive to its volatility and liquidity. In a model with one safe and one risky asset, with constant investment…
A power market with non-convexities may not have an equilibrium price for power that provides economic stability of the centralized dispatch outcome. In this case, the market players are entitled to receive the uplift payments that…
With the daily and minutely data of the German DAX and Chinese indices, we investigate how the return-volatility correlation originates in financial dynamics. Based on a retarded volatility model, we may eliminate or generate the…
We consider a utility-maximization problem in a general semimartingale financial model, subject to constraints on the number of shares held in each risky asset. These constraints are modeled by predictable convex-set-valued processes whose…
We theorize the financial health of a company and the risk of its default. A company is financially healthy as long as its equilibrium in the financial system is maintained, which depends on the cost attributable to the probability that…
This paper studies the general relationship between the gearing ratio of a Leveraged ETF and its corresponding expense ratio, viz., the investment management fees that are charged for the provision of this levered financial service. It must…
Market making refers to a form of trading in financial markets characterized by passive orders which add liquidity to limit order books. Market makers are important for the proper functioning of financial markets worldwide. Given the…
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…
To avoid simultaneous charging and discharging of storages, complementarity constraints are introduced to storage-concerned economic dispatch (ED), which makes the problem non-convex. This letter concerns the conditions under which the…
This paper examines the dividend and investment policies of a cash constrained firm that has access to costly external funding. We depart from the literature by allowing the firm to issue collateralized debt to increase its investment in…
Take up of microcredit by the poor for investment in businesses or human capital turned out to be very low. We show that this could be explained by risk aversion, without relying on fixed costs or other forms of non-convexity in the…
We investigate the impact of available information on the estimation of the default probability within a generalized structural model for credit risk. The traditional structural model where default is triggered when the value of the firm's…
This paper provides a new theory of the observed co-movement between overall wage inequality and its between-firm component. We develop and solve analytically a frictionless sorting model with two-sided heterogeneity, in which firms consist…
The leverage effect refers to the generally negative correlation between the return of an asset and the changes in its volatility. There is broad agreement in the literature that the effect should be present for theoretical reasons, and it…
Under very general conditions, we construct a micro-macro model for closed economy with a large number of heterogeneous agents. By introducing both financial capital (i.e. valued capital---- equities of firms) and physical capital (i.e.…
We explore a model of the interaction between banks and outside investors in which the ability of banks to issue inside money (short-term liabilities believed to be convertible into currency at par) can generate a collapse in asset prices…
This paper supplies two possible resolutions of Fortune's (2000) margin-loan pricing puzzle. Fortune (2000) noted that the margin loan interest rates charged by stock brokers are very high in relation to the actual (low) credit risk and the…
Although companies are exhorted to provide more information to the financial community, it is evident that they choose different paths based upon their strategic emphasis and competitive environments. Our investigation explores the…