This paper proposes a novel test of zero pricing errors for the linear factor pricing model when the number of securities, N , can be large relative to the time dimension, T , of the return series. The test is based on Student t tests of individual securities and has a number of advantages over the existing standardised Wald type tests. It allows for non-Gaussianity and general forms of weakly ...

This paper uses minimum-variance (MV) admissible kernels to estimate risk premia associated with economic risk variables and to test multi-beta models. Estimating risk premia using MV kernels is appealing because it avoids the need to 1) identify all relevant sources of risk and 2) assume a linear factor model for asset returns. Testing multi-beta models in terms of restricted MV kernels has th...

Inception of Markowitz’s modern portfolio theory has also fuelled the development of asset pricing models for empirical finance, ranging from linear single-factor models like the capital asset pricing model to fairly complex multi-factor models such as the arbitrage pricing theory (APT). It is well-known in the literature of finance that APT could be used for modelling the underlying security r...

This paper examines the relationship between option pricing models that use stochastic dominance concepts in discrete time, and the traditional arbitrage-based continuous time models. It derives multiperiod discrete time index option bounds based on stochastic dominance considerations for a risk-averse investor holding only the underlying asset, the riskless asset and (possibly) the option for ...

We present a new multiagent model for the multiperiod portfolio selection problem. Individual agents receive a share of initial wealth, and follow an investment strategy that adjusts their portfolio as they observe movements of the market over time. The agents share their wealth at the end of the nal investment period. We show that a multiagent system can outperform a single agent that invests ...

Using an agent-based multi-asset artificial stock market, we simulate the survival dynamics of investors with different risk preferences. It is found that the survivability of investors is closely related to their risk preferences. Among the eight types of investors considered in this paper, only the CRRA investors with RRA coefficients close to one can survive in the long run. Other types of a...

In this paper, we develop a framework for valuing real options and portfolios of real options in incomplete markets and show that it is a consistent generalization of contingent claims analysis, which is conventionally used for real option valuation in complete markets. The development of a framework for incomplete markets is motivated by the difficulty to construct replicating portfolios in pr...

This paper demonstrates that quality-contingent pricing is a useful mechanism for mitigating the negative effects of quality uncertainty in e-commerce and IT services. A contingency pricing contract specifies a sequence of possible quality levels and corresponding prices. The market estimates the firms performance at various quality levels based on historical statistics, and the firm may have a...

This paper offers an alternative method for estimating expected returns. The proposed reward beta approach performs well empirically and is based on asset pricing theory. The empirical section compares this approach with the CAPM and the Fama-French three-factor model. In out-of-sample testing, both the CAPM and the three-factor model are rejected. In contrast, the reward beta approach easily p...

This paper develops a new methodology for estimating and testing conditional factor models in finance. We propose a two-stage procedure that naturally unifies the two existing approaches in the finance literature–the parametric approach and the nonparametric approach. Our combined approach possesses important advantages over both methods. Using our two-stage combined estimator, we derive new te...