We develop a two sector general equilibrium model with capital accumulation and convex adjustment costs. We use the model to study capital asset pricing and reallocation, as well as optimal consumption and investment decisions. With two sectors, the consumer balances diversification against the potential productivity and efficiency gains of investing more heavily in one sector. The general fram...

A famous model in nancial theory is the Capital Asset Pricing Model (CAPM). In this paper we propose a two state CAPM in which we assume that excess returns for the market and for a particular security are bivariate normally distributed. The parameters of the distribution are determined by the state of an unobserved stationary Markov chain. Two states represent two business regimes that are cha...

Using Shafer and Vovk’s game-theoretic framework for probability, we derive a capital asset pricing model from an efficient market hypothesis, with no assumptions about the beliefs or preferences of investors. Our efficient market hypothesis says that a speculator with limited means cannot beat a particular index by a substantial factor. The model we derive says that the difference between the ...

In this paper, we discuss the paradigm shift in bank capital from the “gone concern” to the “going concern” mindset. We then propose a methodology for pricing a product of this shift called Contingent Capital Notes (“CoCos”). The Merton Model can determine a price for credit risk by using the firm’s equity value as a call option on those assets. Our pricing methodology for CoCos also uses the c...

This paper examines the possibility of developing a risk management instrument by designing a financial security whose value is linked to the average revenue of a given area. This type of program is sufficiently general to be considered for any group of businesses that face production uncertainty. In agriculture, it has been proposed as an alternative to multiple peril crop insurance programs, ...

Spatial dependency has been broadly studied in several research areas, such as environmental criminology, economic geography, environmental sciences, and urban economics. However, it has been essentially overlooked in other subfields of economics and in the field of finance as a whole. A key element at stake is the definition of contiguity. In the context of financial markets, defining a metric...

Recent researches on stock market volatility have found considerable empirical evidence for the persistence of variance in stock market returns. The ARCH and unit root models in different versions analysed by Engle and Bollerslev (1986), Schwert (1989) and Nelson (1991) have usually discussed the conditional variance process as a function of lagged variance, where the skewness of the return dis...

This paper examines how stock prices are affected by research and development activities for Danish firms for the period, 1989 to 2002. Both through analysis of portfolios and regression analysis, the role of R&D assets is considered along with a number of other fundamental factors, such as size, the book to market ratio, leverage and the CAPM beta. There is at best a weak indication that R&D i...

Computational Grids are a promising platform for executing large-scale resource intensive applications. This paper identifies challenges in managing resources in a Grid computing environment and proposes computational economy as a metaphor for effective management of resources and application scheduling. It identifies distributed resource management challenges and requirements of economy-based ...