Because of external financing costs, private business owners often need to self-finance new investment projects. These self-financing needs create an incentive for business owners to hold financial assets whose payoffs are positively correlated with self-financing needs. If this effect is aggregated, expected returns on financial assets should be negatively correlated with aggregate private inv...

Entrepreneurs need cash to finance their investments. Since cash is costly to hold, entrepreneurs underinvest. If entrepreneurs are able to access secondary financial markets, then they can sell some of their less liquid assets for cash and invest at a higher level. When the secondary financial markets are over-the-counter (OTC), the amount of liquidity (cash) that is in the market affects asse...

The reusability of assets is usually measured through reusability indices. However, these indices either do not synthesize their constituent metrics into an aggregate or they do not capture all facets of reusability, such as structural characteristics, external qualities, and their documentation. To alleviate these shortcomings, we introduce a reusability index (REI) as a synthesis of various s...

A basic tenet of microeconomics suggests that the subjective value of financial gains decreases with increasing assets of individuals ("marginal utility"). Using concepts from learning theory and microeconomics, we assessed the capacity of financial rewards to elicit behavioral and neuronal changes during reward-predictive learning in participants with different financial backgrounds. Behaviora...

In strict terms, the Capital Asset Pricing Model applies only to marketed assets, but the CAPM is frequently used to assign prices to nonmarketed assets as well. The Correlation Pricing Formula (CPF) is similar in form to the CAPM, and gives the same result. However, the CPF expresses the price of a nonmarketed asset in terms of a priced asset that is most correlated with the nonmarketed asset,...

Good decision-making often requires people to perceive and handle a myriad of statistical correlations. Notably, optimal portfolio theory depends upon a sophisticated understanding of the correlation among financial assets. In this paper, we examine people’s understanding of correlation using a sequence of portfolio-allocation problems and find it to be strongly imperfect. Our experiment uses p...

In this paper, we aim at 1. giving formulas of prices and replicating-strategies of defaultable securities(e.g., bonds, swaps, derivatives) in incomplete market, and 2. giving “solvable” examples of quantile hedging strategies in incomplete market. Considering an incomplete market that consists of tradable assets and an unhedgeable defaultable security, whose non-predictable default time has st...

In this paper, we focus on introducing the Variance Swap and estimating the portfolios. The portfolios of the Variance Swap are optimized based on maximizing the distorted expectation given the index of acceptability. The variance strike is calculated from the option surface calibration. The realized variance is constructed through Hardy-Littlewood transform considering the highly correlated au...

We analyze the portfolio choice of an investor who can invest in two risky assets (in addition to a riskless asset) and who is subject to taxes on realized capital gains. These taxes appear in the portfolio choice problem as a form of time-dependent, endogenous transaction costs. Similar to the case of portfolio choice with transaction costs, the optimal strategy of the taxable investor contain...

This paper generalizes Moody's correlated binomial default distribution for homogeneous (exchangeable) credit portfolio, which is introduced by Witt, to the case of inhomogeneous portfolios. As inhomogeneous portfolios, we consider two cases. In the first case, we treat a portfolio whose assets have uniform default correlation and non-uniform default probabilities. We obtain the default probabi...