The intertemporal capital asset pricing model of Merton (1973) is examined using the dynamic conditional correlation (DCC) model of Engle (2002). The mean-reverting DCC model is used to estimate a stock’s (portfolio’s) conditional covariance with the market and test whether the conditional covariance predicts time-variation in the stock’s (portfolio’s) expected return. The risk-aversion coeffic...

Established illiquidity measures are constructed for emerging markets in Africa and used to determine which best explain trading costs. Costs of equity are derived from an augmented CAPM for a sample of emerging financial markets generally ignored in the literature. These include: South Africa and Namibia, three countries in North Africa and four in SSA, plus London and Paris as examples of int...

We consider some further applications of martingale pricing to problems in financial engineering. In particular, we will show how dynamic portfolio optimization problems in complete markets may be solved using martingale pricing methods. We will see, as a result, how the problems of security pricing and portfolio optimization are very closely related. We then introduce real options and discuss ...

We investigate the analytical and empirical linkages between cash flow, uncertainty and firms’ capital investment behavior. Our empirical approach constructs measures of ownand market-specific uncertainty from firms’ daily stock returns and S&P 500 index returns along with a CAPM-based risk measure. Our results indicate that even in the presence of important firm-specific variables, uncertainty...

A risk-minimizing portfolio model under uncertainty with randomness and fuzziness is discussed. By a perception-based extension of estimations for fuzzy random variables, the risk-minimizing portfolio problem is developed. In the uncertainty model, the randomness and fuzziness are evaluated respectively by the probabilistic expectation and mean values with evaluation weights and -mean functions...

This paper examines the validity of the Sharpe-Linter-Black Capital Asset Pricing Model (CAPM) to stocks traded on the Barbados, Jamaica and Trinidad & Tobago Stock Exchanges. Tests of the CAPM are based on portfolio betas made up of stocks emanating from all three exchanges and are carried out on the alternative multifactor specification proposed by Fama and French (1992), extended to include ...

We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor-manager relationship is non-exclusive. Investors transfer their securities allocations to managers, managers trade in a competitive marketplace to achieve new allocations, and payo↵s are distributed back to investors after subtraction of a por...

Time-varying risk premia traditionally have been associated with the empirical fact that conditional second moments are time-varying. This paper additionally examines another possible source for time-varying risk premia, namely the market price of risk (lambda). For utility functions that do not imply constant risk aversion measures, the market price of risk will in general change over time. We...

We provide a representation for the nonmyopic optimal portfolio of an agent consuming only at the terminal horizon when the single state variable follows a general diffusion process and the market consists of one risky asset and a risk-free asset. The key term of our representation is a new object that we call the “rate of macroeconomic fluctuation” whose properties are fundamental for the port...

In this paper, we present the fundamental framework of the evaluation problem under which the evaluation operator satisfying some axioms is linear. Based on the dynamic linear evaluation mechanism of contingent claims, studying this evaluation rule in the market driven by fractional Brownian motions has led to a dynamic capital asset pricing model. It is deduced here mainly with the fractional ...