In theory, valuation effects (changes in net external assets of a country arising from movements in exchange rates or asset returns) are an important channel of international risk sharing as they facilitate external adjustment. However, the effects can also be economically destabilizing in the presence of frictions in the international financial system. Despite the growing significance of valua...

Exact inference methods are proposed for asset pricing models with unobservable risk-free rates and coskewness; specifically, the Quadratic Market Model (QMM) which incorporates the effect of asymmetry of return distribution on asset valuation. In this context, exact tests are appealing given (i) the increasing popularity of such models in finance, (ii) the fact that traditional market models (...

Exploring long-term implications of valuation leads us to recover and use a distorted probability measure that reflects the long-term implications for risk pricing. This measure is typically distinct from the physical and the risk neutral measures that are well known in mathematical finance. We apply a generalized version of Perron-Frobenius theory to construct this probability measure and pres...

We present a Lie algebraic technique for the valuation of multi-asset financial derivatives with time-dependent parameters. Exploiting the dynamical symmetry of the pricing partial differential equations of the financial derivatives, the new method enables us to derive analytical closed-form pricing formulae very straightforwardly. We believe that this new approach will provide an efficient and...

In this paper an epistemological model of learning fields of probabilistic events is formalized. It is used to explain resource allocation governed by pervasive complementarities as the sign of unity of knowledge. Such an episteme is induced epistemologically into interacting, integrating and evolutionary variables representing the problem at hand. The end result is the formalization of a p...

This paper extends the marketed asset disclaimer approach for real option valuation. In sharp contrast to the dominant real option valuation that assumes a stochastic process for an investment’s capital value, this paper demonstrates the valuation of a real option assuming that cash flow follows a stochastic process. We show that this method is at least equally effective and sometimes more intu...

Exploring long-term implications of valuation leads us to recover and use a distorted probability measure that reflects the long-term implications for risk pricing. This measure is typically distinct from the physical and the risk neutral measures that are well known in mathematical finance. We apply a generalized version of Perron-Frobenius theory to construct this probability measure and pres...

In a standard asset price model with rational expectations and short-term shocks, long-term shocks affect the distribution of agents’ risk-aversions. Price uncertainty and learning about the distribution are simultaneously determined in an equilibrium. For some parameters, there may be multiple equilibria. In one of them demand is low, there is little revelation of information and uncertainty i...