The paper derives and experimentally tests a theoretical model of speculation in multiperiod asset markets with public information flows. The speculation arises from the traders’ heterogeneous posteriors as they make different inferences from sequences of public information. This leads to overpricing in the sense that price exceeds the most optimistic belief about the real value of the asset. W...

We consider the impact of “large” changes in asset prices on intra-market correlations in domestic and international markets. Assuming normally distributed asset returns, we show that the absolute magnitude of the correlation, conditional on a change greater than or equal to a given absolute size of one of the variables, is monotonically increasing in the magnitude of that absolute change. Empi...

This paper proposes a general equilibrium model that aims at quantifying the distributive effects of anticipated inflation in an incomplete market economy with heterogeneous agents. Based on empirical evidence, this paper assumes a fixed cost to participate in financial markets, which in equilibrium generates a theory of money. Money is a return dominated asset, but also a costless mean to smoo...

Cox & Leland (2000) used techniques from the field of stochastic control theory to show that in the particular case of a Brownian motion for the asset log-returns risk averse decision makers with a fixed investment horizon prefer path-independent pay-offs over path-dependent ones. In this note we provide a novel and simple proof for the Cox & Leland result and we will extend it to general Lévy ...

Cox & Leland (2000) use techniques from the field of stochastic control theory to show that in the particular case of a Brownian motion for the asset returns all risk averse decision makers with a fixed investment horizon prefer path-independent pay-offs over path-dependent ones. We will provide a novel and simple proof for the Cox & Leland result and we will extend it to general, not necessari...

In this paper, we present a quantum version of some portions of Mathematical Finance, including theory of arbitrage, asset pricing, and optional decomposition in financial markets based on finite dimensional quantum probability spaces. As examples, the quantum model of binomial markets is studied. We show that this quantum model ceases to pose the paradox which appears in the classical model of...

Classical models of General Equilibrium Theory, both with complete markets and incomplete markets, assume that all borrowers fully keep their promises. This assumption was heavily criticized as it does not reflect actual financial markets practices. In the Nineties, general equilibrium models have allowed for default. More precisely, borrowers may actually default on future asset returns. When ...

Theoretical finance is essentially the study of inter-temporal arbitrage, but it is often interesting also to analyze relationships between asset prices. Cross-sectional analysis makes it possible to purge both field and laboratory data of unobservable changes in time-varying fundamentals. Also, although backward induction is at the heart of asset-pricing theory, subjects may find its logic dau...

This paper develops a series of simple heterogeneous-agents economies in order to study the welfare implications of labor market inequality. We perform two types of welfare calculations. First we compute the welfare cost of a rise in labor market risk, given a particular asset market structure (complete markets, incomplete markets, autarky). Second, we compute the expected gain from completing ...

We investigate financial market correlations using random matrix theory and principal component analysis. We use random matrix theory to demonstrate that correlation matrices of asset price changes contain structure that is incompatible with uncorrelated random price changes. We then identify the principal components of these correlation matrices and demonstrate that a small number of component...