Related papers: Zero-Leverage Puzzle
The existence of time-lagged cross-correlations between the returns of a pair of assets, which is known as the lead-lag relationship, is a well-known stylized fact in financial econometrics. Recently some continuous-time models have been…
Multi-speed transmissions can enhance the performance and reduce the overall cost of an electric vehicle, but they also introduce a challenge: avoiding gearshift jerk, which may sometimes prove to be impossible in the presence of motor and…
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…
In mainstream neoclassical economics, utility maximization is the only engine of individual action, and the other or the social, if it is modeled for decisions deemed fundamental, it is done as a tacit externality parameter affecting an…
In the presence of non-convexities, the power market may not have an equilibrium price for power that provides economic stability of the centralized dispatch outcome. In this case, to achieve an economically stable outcome, the uplift…
This article introduces a new mathematical concept of illiquidity that goes hand in hand with credit risk. The concept is not volume- but constraint-based, i.e., certain assets cannot be shorted and are ineligible as num\'eraire. If those…
In portfolio compression, market participants (banks, organizations, companies, financial agents) sign contracts, creating liabilities between each other, which increases the systemic risk. Large, dense markets commonly can be compressed by…
This paper discusses a novel explanation for asymmetric volatility based on the anchoring behavioral pattern. Anchoring as a heuristic bias causes investors focusing on recent price changes and price levels, which two lead to a belief in…
The article presents a translation of some widespread financial terminology into the language of decision theory. For instance, financial leverage can be regarded as an object of choice or a decision. We show how the optics of decision…
This paper provides a framework for modeling the financial system with multiple illiquid assets when liquidation of illiquid assets is caused by failure to meet a leverage requirement. This extends the network model of Cifuentes, Shin &…
The instability of the financial system as experienced in recent years and in previous periods is often linked to credit defaults, i.e., to the failure of obligors to make promised payments. Given the large number of credit contracts, this…
We introduce capital flow constraints, loss of good will and loan to the lot sizing problem. Capital flow constraint is different from traditional capacity constraints: when a manufacturer launches production, its present capital should not…
In this paper, we examine the interlinkages among firms through a financial network where cross-holdings on both equity and debt are allowed. We relate mathematically the correlation among equities with the unconditional correlation of the…
This paper analyzes the equilibrium of insurance market in a dynamic setting, focusing on the interaction between insurers' underwriting and investment strategies. Three possible equilibrium outcomes are identified: a positive insurance…
The deployment of machine learning in high-stakes services relies on ``human-in-the-loop'' architectures to mitigate algorithmic uncertainty. However, existing static policies fail to address a fundamental tension: algorithms suffer from…
In modern portfolio theory, the balancing of expected returns on investments against uncertainties in those returns is aided by the use of utility functions. The Kelly criterion offers another approach, rooted in information theory, that…
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…
This paper characterizes the equilibrium in a continuous time financial market populated by heterogeneous agents who differ in their rate of relative risk aversion and face convex portfolio constraints. The model is studied in an…
We study financial systems from a game-theoretic standpoint. A financial system is represented by a network, where nodes correspond to firms, and directed labeled edges correspond to debt contracts between them. The existence of cycles in…
This paper provides a general framework for modeling financial contagion in a system with obligations in multiple illiquid assets (e.g., currencies). In so doing, we develop a multi-layered financial network that extends the single network…