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On certain representations of pricing functionals Annals of Finance Pub Date : 2024-03-15 Carlo Marinelli
We revisit two classical problems: the determination of the law of the underlying with respect to a risk-neutral measure on the basis of option prices, and the pricing of options with convex payoffs in terms of prices of call options with the same maturity (all options are European). The formulation of both problems is expressed in a language loosely inspired by the theory of inverse problems, and
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Skewness-seeking behavior and financial investments Annals of Finance Pub Date : 2024-02-26 Matteo Benuzzi, Matteo Ploner
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Affine Heston model style with self-exciting jumps and long memory Annals of Finance Pub Date : 2024-01-12 Charles Guy Njike Leunga, Donatien Hainaut
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How does soft information on the causes of default affect debt renegotiation? The Italian evidence Annals of Finance Pub Date : 2024-01-11 Ludovico Maria Cocco, Elisa Cavezzali, Ugo Rigoni, Giorgia Simion
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The kind of silence: managing a reputation for voluntary disclosure in financial markets Annals of Finance Pub Date : 2023-10-13 Miles B. Gietzmann, Adam J. Ostaszewski
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Robustness and sensitivity analyses of rough Volterra stochastic volatility models Annals of Finance Pub Date : 2023-08-04 Jan Matas, Jan Pospíšil
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Nonparametric estimates of option prices via Hermite basis functions Annals of Finance Pub Date : 2023-08-04 Carlo Marinelli, Stefano d’Addona
We consider approximate pricing formulas for European options based on approximating the logarithmic return’s density of the underlying by a linear combination of rescaled Hermite polynomials. The resulting models, that can be seen as perturbations of the classical Black-Scholes one, are nonpararametric in the sense that the distribution of logarithmic returns at fixed times to maturity is only assumed
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The no-arbitrage pricing of non-traded assets Annals of Finance Pub Date : 2023-08-01 Robert A. Jarrow
This paper shows how to uniquely price non-traded assets using no-arbitrage in an otherwise frictionless market setting. The approach requires the assumption that the hedging error, properly defined, is non-priced or idiosyncratic risk. This methodology can be applied to private loans, illiquid publicly traded debt, insurance contacts, private equity, real estate, and real options.
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What can monetary policy tell us about Bitcoin? Annals of Finance Pub Date : 2023-07-26 Marcin Pietrzak
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The value of expected return persistence Annals of Finance Pub Date : 2023-07-01 Wolfgang Schadner, Sebastian Lang
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Sentiment-based indicators of real estate market stress and systemic risk: international evidence Annals of Finance Pub Date : 2023-06-16 Mikhail Stolbov, Maria Shchepeleva
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No-arbitrage conditions and pricing from discrete-time to continuous-time strategies Annals of Finance Pub Date : 2023-04-24 Dorsaf Cherif, Emmanuel Lépinette
In this paper, a general framework is developed for continuous-time financial market models defined from simple strategies through conditional topologies that avoid stochastic calculus and do not necessitate semimartingale models. We then compare the usual no-arbitrage conditions of the literature, e.g. the usual no-arbitrage conditions NFL, NFLVR and NUPBR and the recent AIP condition. With appropriate
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A compositional analysis of systemic risk in European financial institutions Annals of Finance Pub Date : 2023-04-18 Anna Maria Fiori, Francesco Porro
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Co-jumps and recursive preferences in portfolio choices Annals of Finance Pub Date : 2023-02-16 Immacolata Oliva, Ilaria Stefani
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The valuation of corporations: a derivative pricing perspective Annals of Finance Pub Date : 2023-02-05 Dilip B. Madan, King Wang
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The optimal financing of a conglomerate firm with hidden information and costly state verification Annals of Finance Pub Date : 2023-02-05 Rosa Ferrentino, Luca Vota
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Uncertainty in firm valuation and a cross-sectional misvaluation measure Annals of Finance Pub Date : 2023-01-17 Giulio Bottazzi, Francesco Cordoni, Giulia Livieri, Stefano Marmi
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Analysis of fair fee in guaranteed lifelong withdrawal and Markovian health benefits Annals of Finance Pub Date : 2023-01-17 Guglielmo D’Amico, Shakti Singh, Dharmaraja Selvamuthu
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The market value of SMEs: a comparative study between private and listed firms in alternative stock markets Annals of Finance Pub Date : 2023-01-05 Leslie Rodríguez-Valencia, Prosper Lamothe-Fernández, David Alaminos
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Drawdown risk measures for asset portfolios with high frequency data Annals of Finance Pub Date : 2022-12-30 Giovanni Masala, Filippo Petroni
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A behavioral approach to inconsistencies in intertemporal choices with the Analytic Hierarchy Process methodology Annals of Finance Pub Date : 2022-12-05 Viviana Ventre, Cruz Rambaud Salvador, Roberta Martino, Fabrizio Maturo
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Integrating market conditions into regulatory decisions on microfinance interest rates: does competition matter? Annals of Finance Pub Date : 2022-11-21 Tristan Caballero-Montes
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Connectivity, centralisation and ‘robustness-yet-fragility’ of interbank networks Annals of Finance Pub Date : 2022-11-15 Mario Eboli, Bulent Ozel, Andrea Teglio, Andrea Toto
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Delta-hedging in fractional volatility models Annals of Finance Pub Date : 2022-11-09 Qi Zhao, Alexandra Chronopoulou
In this paper, we propose a delta-hedging strategy for a long memory stochastic volatility model (LMSV). This is a model in which the volatility is driven by a fractional Ornstein–Uhlenbeck process with long-memory parameter H. We compute the so-called hedging bias, i.e. the difference between the Black–Scholes Delta and the LMSV Delta as a function of H, and we determine when a European-type option
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Bargaining power and renegotiation of small private debt contracts Annals of Finance Pub Date : 2022-09-14 José Valente, Mário Augusto, José Murteira
The present study is focused on the renegotiation of small debt contracts for small and medium-sized enterprises (SMEs). We use a proprietary database from a Brazilian bank and find that, when compared to large loans, the probability of renegotiation of small loans is much lower. We argue that this is due to the lack of ex-ante contingencies in this kind of loan, which reduces the transfer of control
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Dynamic optimal mean-variance portfolio selection with stochastic volatility and stochastic interest rate Annals of Finance Pub Date : 2022-09-01 Yumo Zhang
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Some properties of portfolios constructed from principal components of asset returns Annals of Finance Pub Date : 2022-07-30 Thomas A. Severini
Principal components analysis (PCA) is a well-known statistical method used to analyze the covariance structure of a random vector and for dimension reduction. When applied to an N-dimensional random vector of asset returns, PCA produces a set of N principal components, linear functions of the asset return vector that are mutually uncorrelated and which have some important statistical properties. The
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Two sided efficient frontiers at multiple time horizons Annals of Finance Pub Date : 2022-06-06 Dilip B. Madan, King Wang
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Dynamic optimal hedge ratio design when price and production are stochastic with jump Annals of Finance Pub Date : 2022-05-02 Nyassoke Titi Gaston Clément, Sadefo Kamdem Jules, Fono Louis Aimé
In this paper, we focus on the farmer’s risk income when using commodity futures, when price and output processes are randomly correlated and represented by jump-diffusion models. We evaluate the expected utility of the farmer’s wealth and determine the optimal consumption rate and hedging position at each point in time given the harvest timing and state variables. We find a closed form for the optimal
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Derivatives-based portfolio decisions: an expected utility insight Annals of Finance Pub Date : 2022-04-28 Marcos Escobar-Anel, Matt Davison, Yichen Zhu
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Rational pricing of leveraged ETF expense ratios Annals of Finance Pub Date : 2022-04-12 Alex Garivaltis
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Portfolio selection in quantile decision models Annals of Finance Pub Date : 2022-03-29 Luciano de Castro, Antonio F. Galvao, Gabriel Montes-Rojas, Jose Olmo
This paper develops a model for optimal portfolio allocation for an investor with quantile preferences, i.e., who maximizes the \(\tau \)-quantile of the portfolio return, for \(\tau \in (0,1)\). Quantile preferences allow to study heterogeneity in individuals’ portfolio choice by varying the quantiles, and have a solid axiomatic foundation. Their associated risk attitude is captured entirely by a
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Options on bonds: implied volatilities from affine short-rate dynamics Annals of Finance Pub Date : 2022-03-11 Matthew Lorig, Natchanon Suaysom
We derive an explicit asymptotic approximation for the implied volatilities of Call options written on bonds assuming the short-rate is described by an affine short-rate model. For specific affine short-rate models, we perform numerical experiments in order to gauge the accuracy of our approximation.
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Regulatory reform and banking diversity: reassessing Basel 3 Annals of Finance Pub Date : 2022-03-02 Giuliana Birindelli, Paola Ferretti, Giovanni Ferri, Marco Savioli
We investigate whether and how strongly Basel 3 chief innovations jointly affected in different ways individual Eurozone banks’ stability (z-score) across six business models (BMs). We study this issue in the initial years when adaptation was most intense (2011–2014) and the Eurozone underwent a phase with sovereign crises abated by ECB policies easing financial conditions. In parallel, we run this
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A portfolio choice problem under risk capacity constraint Annals of Finance Pub Date : 2022-01-31 Weidong Tian, Zimu Zhu
This paper studies the asset allocation problem for a retiree facing longevity risk and living standard risk. We introduce a risk capacity constraint to reduce the living standard risk in the retirement period. Whether the retiree focuses on intertemporal consumption or inheritance wealth, we demonstrate a unique number to measure the expected lump sum of the spending post-retirement. The optimal portfolio
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Equilibrium pricing of commodity spot and forward under incomplete markets with implications on convenience yield Annals of Finance Pub Date : 2022-01-17 Katsushi Nakajima
This paper analyzes the relation between commodity spot, forward prices, and convenience yield under incomplete markets. Since production is a necessary process for commodity markets, we include firms that use inputs and produce outputs in our model. Thus, we show a financial pricing model of spot and forward commodity in an explicit fashion with production under incomplete markets. One of the most
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Multi-stage real option evaluation with double barrier under stochastic volatility and interest rate Annals of Finance Pub Date : 2022-01-08 Michele Bufalo, Antonio Di Bari, Giovanni Villani
This paper focuses on valuing R&D projects using a twofold compound real option by including two knock-out barriers. However, the valuation of R&D projects is not a simple task, since they are characterised by various risks and sequential decision-making. Specifically, we embed a double-barrier in the multi-stage real option in order to mitigate the risk of huge losses for the investor. In this way
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Permutation-weighted portfolios and the efficiency of commodity futures markets Annals of Finance Pub Date : 2022-01-03 Fernholz, Ricardo T., Fernholz, Robert
We study the behavior of permutation-weighted portfolios, portfolios with weights that are proportional to a permutation of the current market weights. For markets with more than two assets, these portfolios are not functionally generated (except for the identity permutation), so we use rank-based methods to analyze their behavior. The reverse-wighted portfolio is the permutation-weighted portfolio
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Constrained dynamic futures portfolios with stochastic basis Annals of Finance Pub Date : 2021-11-07 Chen, Xiaodong, Leung, Tim, Zhou, Yang
We study the problem of dynamically trading multiple futures contracts on different underlying assets subject to portfolio constraints. The spreads between futures and spot prices are modeled by a multidimensional scaled Brownian bridge to account for their convergence at maturity. Under this stochastic basis model, we apply the stochastic control approach to rigorously derive the optimal trading strategies
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Bootstrap rolling-window Granger causality dynamics between momentum and sentiment: implications for investors Annals of Finance Pub Date : 2021-10-26 Nakhli, Mohamed Sahbi, Dhaoui, Abderrazak, Chevallier, Julien
This paper seeks to examine the unidirectional versus bidirectional Granger causality between investors’ sentiment and momentum strategies. It is based on the full sample Granger causality test and the recent rolling-window bootstrap approach. We also applied a probit model to the extent to which the probability that investors’ sentiment and momentum strategies influence each other. Our results suggest
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Bank business models, negative policy rates, and prudential regulation Annals of Finance Pub Date : 2021-10-13 Savona, Roberto
Using data from Italian banks over the period 2011–2017, we study how negative interest rate policy and prudential regulation impact on bank business models. We report four key findings. First, banks shifted into retail- and market-oriented business models. Second, high- and low-deposit banks reduced loans and increased security/liquid assets; only market-oriented banks expanded lending. Third, interest
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Welfare implications of mitigating investment uncertainty Annals of Finance Pub Date : 2021-09-15 Ogawa, Takayuki, Sakamoto, Jun
This study explores the welfare implications of mitigating investment uncertainty in the context of Easley and O’Hara (Rev Financ Stud 22:1817–1843, 2009) While one may expect welfare gains by encouraging participation in financial markets by ambiguity-averse investors, we formally show that it hurts other investors and thus is not Pareto-improving without appropriate income transfers. We also examine
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Performance of advanced stock price models when it becomes exotic: an empirical study Annals of Finance Pub Date : 2021-08-28 Junike, Gero, Schoutens, Wim, Stier, Hauke
We calibrate several advanced stock price models to a time series of real market data of European options on the DAX. Via a Monte Carlo simulation, we price barrier down-and-out call options for all models and compare the modeled prices to given real market data of the barrier options. The Bates model reproduces barrier option prices very well. The BNS model overvalues and Lévy models with stochastic
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Deposit insurance and reinsurance Annals of Finance Pub Date : 2021-07-29 Britz, Volker, Gersbach, Hans, Haller, Hans
We study the consequences and optimal design of bank deposit insurance and reinsurance in a general equilibrium setting. The model involves two production sectors, financed by bonds and bank loans, respectively. Financial intermediation by banks is required in the model as we assume that one of the production sectors is risky and requires monitoring by banks. Households fund banks through deposits
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On the money creation approach to banking Annals of Finance Pub Date : 2021-07-27 Salomon Faure, Hans Gersbach
We study today’s two-tier money creation and destruction system: Commercial banks create bank deposits (privately created money) through loans to firms or asset purchases from the private sector. Bank deposits are destroyed when households buy bank equity or when firms repay loans. Central banks create electronic central bank money (publicly created money or reserves) through loans to commercial banks
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Fractional Barndorff-Nielsen and Shephard model: applications in variance and volatility swaps, and hedging Annals of Finance Pub Date : 2021-07-13 Nicholas Salmon, Indranil SenGupta
In this paper, we introduce and analyze the fractional Barndorff-Nielsen and Shephard (BN-S) stochastic volatility model. The proposed model is based upon two desirable properties of the long-term variance process suggested by the empirical data: long-term memory and jumps. The proposed model incorporates the long-term memory and positive autocorrelation properties of fractional Brownian motion with
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Model uncertainty on commodity portfolios, the role of convenience yield Annals of Finance Pub Date : 2021-07-07 Junhe Chen, Marcos Escobar-Anel
This paper investigates the effect of model uncertainty on the performance of commodity-based portfolios. We consider a constant relative risk aversion (CRRA) utility maximizer investor in a complete market, with independent ambiguity-aversion levels for the three factors explaining the term structure of future prices, namely, spot prices, convenience yield (CY) and interest rates (IRs), as proposed
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Systemic risk measurement: bucketing global systemically important banks Annals of Finance Pub Date : 2021-07-07 Marina Brogi, Valentina Lagasio, Luca Riccetti
The general consensus on the need to enhance the resilience of the financial system has led to the imposition of higher capital requirements for certain institutions, supposedly based on their contribution to systemic risk. Global Systemically Important Banks (G-SIBs) are divided into buckets based on their required additional capital buffers ranging from 1% to 3.5%. We measure the marginal contribution
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Birds of a feather: separating spillovers from shocks in sovereign default Annals of Finance Pub Date : 2021-06-23 Ryan Rudderham
In this paper, I propose a tractable model of sovereign default and the inter-state spillovers emanating from default. A coalition of nations may choose to insure against default, and the behavior of the coalition is used to examine the magnitude of the international spillovers. A voting structure for the coalition is proposed to examine idiosyncratic spillovers. The model is calibrated to the recent
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Economic profitability and (non)additivity of residual income Annals of Finance Pub Date : 2021-06-18 Carlo Alberto Magni
We show that the standard notion of residual income (RI) does not fulfill additive coherence. This gives rise to ambiguities and inconsistencies. The pitfall resides in the capital charge, which blends a non-market value with a market rate. We solve the problem by using a capital charge based on economic return, obtained as the product of a market value and a market rate. The resultant economic RI
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Valuation of R&D compound option using Markov chain approach Annals of Finance Pub Date : 2021-05-31 Guglielmo D’Amico, Giovanni Villani
Incorporation of technical risk in compound real options has been considered in Cassimon et al. (2011) concerning the valuation of multi-stage pharmaceutical R&D. There, the technical success probabilities at each development stage were assumed to be generated independently of each other. This assumption can be unrealistic in many applied problems, pharmaceutical R&D included. We present a valuation
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A stock market model based on CAPM and market size Annals of Finance Pub Date : 2021-05-31 Brandon Flores, Blessing Ofori-Atta, Andrey Sarantsev
We introduce a new system of stochastic differential equations which models dependence of market beta and unsystematic risk upon size, measured by market capitalization. We fit our model using size deciles data from Kenneth French’s data library. This model is somewhat similar to generalized volatility-stabilized models. The novelty of our work is twofold. First, we take into account the difference
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Blind portfolios’ auctions in two-rounds Annals of Finance Pub Date : 2021-04-12 Lamprini Zarpala, Dimitris Voliotis
This paper proposes a two-stage sealed-bid model for the execution of portfolios. An asset manager auctions a portfolio of securities to a set of brokers who are unaware of the specific details about individual securities. We prove that our mechanism may reduce the costs of execution for the asset manager and may mitigate the “winner’s curse” for participating brokers.
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Equilibrium asset pricing and the cross section of expected returns Annals of Finance Pub Date : 2021-03-24 Joel M. Vanden
In a mean-variance framework with a representative agent, any linear model for the cross section of expected returns can be supported as an equilibrium as long as the market portfolio is spanned by the factor mimicking portfolios. Any set of factors is admissible as long as the spanning condition is satisfied. Factors based on size, book-to-market, momentum, investment, profitability, behavioral biases
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A volatility smile-based uncertainty index Annals of Finance Pub Date : 2021-03-12 José Valentim Machado Vicente, Jaqueline Terra Moura Marins
We propose a new uncertainty index based on the discrepancy of the smile of FX options. We show that our index spikes near turbulent periods, forecasts economic activity and its innovations hold a significant and negative equity premium. Unlike other uncertainty indexes, our index is supported by equilibrium models, which relate the difference of options prices across moneyness to uncertainty. Moreover
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On modifications of the Bachelier model Annals of Finance Pub Date : 2021-01-18 Alexander Melnikov, Hongxi Wan
Mathematically, stock prices described by a classical Bachelier model are sums of a Brownian motion and an absolute continuous drift. Hence, stock prices can take negative values, and financially, it is not appropriate. This drawback is overcome by Samuelson who has proposed the exponential transformation and provided the so-called Geometrical Brownian motion. In this paper, we introduce two additional
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Optimal group size in microlending Annals of Finance Pub Date : 2021-01-18 Philip Protter, Alejandra Quintos
Microlending, where a bank lends to a small group of people without credit histories, began with the Grameen Bank in Bangladesh, and is widely seen as the creation of Muhammad Yunus, who received the Nobel Peace Prize in recognition of his largely successful efforts. Since that time the modeling of microlending has received a fair amount of academic attention. One of the issues not yet addressed in
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The Shapley value decomposition of optimal portfolios Annals of Finance Pub Date : 2020-11-27 Haim Shalit
Investors want the ability to evaluate the true and complete risk of the financial assets held in a portfolio. Yet, the current analytic methods provide only partial risk measures. I suggest that, by viewing a portfolio of securities as a cooperative game played by the assets that minimize portfolio risk, investors can calculate the exact value, each security contributes to the common payoff of the
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Heterogeneous beliefs, monetary policy, and stock price volatility Annals of Finance Pub Date : 2020-11-09 Katsuhiro Oshima
In this paper, I build a two-agent New Keynesian model in which households with subjective and objective beliefs about capital gains from stock prices exist. The former type of households constructs their beliefs about expected capital gains by Bayesian learning from observed growth rates of stock prices. In a homogenous agent model with only subjective beliefs, the effect of the interest rate on stock
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Two price economic equilibria and financial market bid/ask prices Annals of Finance Pub Date : 2020-11-09 Robert J. Elliott, Dilip B. Madan, Tak Kuen Siu
Demand and supply uncertainty lead to a model of markets that set prices to acceptable risk levels for excess supplies and net revenues. The result is a two price partial equilibrium economy. The equilibrium solutions are applied to two price financial market data to infer demand and supply elasticities and log normal volatilities from market quotes on bid and ask prices. Demand elasticities are observed