Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium the Security Market Line Theorem holds. However, under the specific functional form suggested by Tversky and Kahneman (1992) financial market equilibria do not...

We consider the problem of hedging and pricing claims for delivery of crude oil or natural gas to a given location. We work with a three factor model for the asset spot, the convenience yield and the locational basis. The convenience yield is taken to be unobserved and must be filtered. We study the value function corresponding to utility pricing with exponential utility. Assuming the basis is ...

modern portfolio theories are based on markowitz’s portfolio optimization model that involves the assumption of mean variance behavior and therefore require the asymmetry and normality of returns. this issue also affects the capital asset pricing model that estimates systematic risk and uses it in pricing securities. this article analyzes the various measures of risk. the main purpose of this r...

We put forward a general equilibrium model that links the cross-section variation of expected returns to …rms’life cycle dynamics. In the model all assets have the same exposure to short-run consumption risks, but di¤er in their exposure to long-run consumption risks (Bansal and Yaron (2004)). An econometrician who uses conditional CAPM regression to predict asset returns will obtain higher for...

We investigate the impact of measures of uncertainty on firms’ capital investment behavior using a panel of U.S. firms. Increases in firmspecific and CAPM -based measures have a significant negative effect on investment spending, while market-based uncertainty has a positive impact.

In this paper, I study the behavior of an investor with unit risk aversion who maximizes a utility function defined over the mean and the variance of a portfolio’s return. Conditioning information is accessible without cost and an unconditionally riskless asset is available in the market. The proposed approach makes it possible to compare the performance of a benchmark tangency portfolio (forme...

This paper surveys the field of asset pricing. The emphasis is on the interplay between theory and empirical work and on the trade-off between risk and return. Modern research seeks to understand the behavior of the stochastic discount factor (SDF) that prices all assets in the economy. The behavior of the term structure of real interest rates restricts the conditional mean of the SDF, whereas ...

In this paper, the pricing of a European call option on the underlying asset is performed by using a Monte Carlo method, one of the powerful simulation methods, where the price development of the asset is simulated and value of the claim is computed in terms of an expected value. The proposed approach, applied in Monte Carlo simulation, is based on the Black-Scholes equation which generally def...

This paper formulates a model of utility for a continuous time framework that captures the decision-maker’s concern with ambiguity about both volatility and drift. Corresponding extensions of some basic results in asset pricing theory are presented. First, we derive arbitrage-free pricing rules based on hedging arguments. Ambiguous volatility implies market incompleteness that rules out perfect...