We discuss a Lévy multivariate model for financial assets which incorporates jumps, skewness, kurtosis and stochastic volatility. We use it to describe the behavior of a series of stocks or indexes and to study a multi-firm, value-based default model. Starting from an independent Brownian world, we introduce jumps and other deviations from normality, including non-Gaussian dependence. We use a ...

The relation between physical probabilities (rating) and risk-neutral probabilities (pricing) is derived in a large market with a quasi-factor structure. Factor sensitivities and default probabilities can be estimated for all kinds of credits on historical rating data. Since factor prices are obtainable from market data, the model allows the pricing of non-marketable credits and structured prod...

The paper presents a bivariate SVAR model including growth rates of industrial production and of stock prices. Imposing a long-run restriction à la Blanchard and Quah (1989) that excludes long-run influences of the stock market on real activity allows to decompose stock prices in a fundamental and a nonfundamental component. The results of the forecast error variance decompositions as well as o...

We study the representative consumer’s risk attitude and efficient risk-sharing rules in a singleperiod, single-good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes. We prove that if all consumers have convex absolute risk tolerance, so must the representative consumer. We also identify a relationship between the curvature of an individual cons...

Using an ordinal approach to utility, in the spirit of Hicks (1962, 1967a), it is possible to greatly simplify the theory of asset prices. The basic assumption is to summarize any probability distribution into its moments so that preferences over distributions can be mapped into preferences over vectors of moments. This implies that assets, like Lancaster’s (1966) consumption goods, are bundles...

We experimentally explore how investor decision horizons influence the formation of stock prices. We find that in long-horizon sessions, where investors collect dividends till maturity, prices converge to the fundamental levels derived from dividends through backward induction. In short-horizon sessions, where investors exit the market by receiving the price (not dividends), price levels and pa...

This paper applies an established bid-ask spread decomposition model to spot foreign exchange market in order to assess the impact of European Monetary Union (EMU). Additionally, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order-driven markets. The latter model provides much improved performance. Price clustering is introduced as ...

This pa per suggests a simple method based on Chebyshev approximation at Chebyshev nodes to approximate partial differential equations. The methodology simply consists in determining the value function by using a set of nodes and basis functions. We provide two examples. Pricing an European option and determining the best policy for chatting down a machinery. The suggested method is flexible, e...

We examine the impact of risk-based portfolio constraints on asset prices in an exchange economy. We show that constrained agents scale down their portfolio and behave locally like power utility investors with risk aversion that depends on current market conditions. In contrast to previous results in the literature, we show that the imposition of constraints dampens fundamental shocks, challeng...

We build and estimate a recursive utility equilibrium model of the term structure of interest rates that prices consistently all risk factors that affect bonds. We contrast it with an arbitrage-free model, where prices of risk are estimated freely without preference constraints. In both models, nominal bond yields are affine functions of macroeconomic state variables. The equilibrium model acco...