This study is an attempt to determine how much individuals should invest in social communication, depending on the type of relationships they may form. Two simple models of social relationships are considered. In both models, individuals emit costly signals to advertise their "quality" as potential friends. Relationships are asymmetrical or symmetrical. In the asymmetrical condition (first mode...

This paper studies the optimal behavior of a firm over time that faces the probability of causing an environmental disaster by its activities. Here we can think of explosions in the chemical industry, oil tankers that lose oil, etc. In the static literature a distinction is made between small firms and large firms. Small firms are called undercapitalized in the sense that the share holders are ...

We investigate how and when to diversify capital over assets, i.e., the portfolio selection problem, from a signal processing perspective. To this end, we first construct portfolios that achieve the optimal expected growth in i.i.d. discrete-time two-asset markets under proportional transaction costs. We then extend our analysis to cover markets having more than two stocks. The market is modele...

In this paper we analyze a continuous-time model of investment with uncertainty, irreversibility and a broad class of lumpy adjustment costs. We show that the two components of the optimal investment strategy, the investment trigger and the investment increment, can be found sequentially, and that the optimal investment increment maximizes a closed form function. Solving the model numerically, ...

We consider the problem of maximizing terminal utility in a model where asset prices are driven by Wiener processes, but where the various rates of returns are allowed to be arbitrary semimartingales. The only information available to the investor is the one generated by the asset prices and, in particular, the return processes cannot be observed directly. This leads to an optimal control probl...

In the insurance market, the insurers who provide catastrophe insurance face with the risk of rare, but huge catastrophe claims. The introduction of catastrophe related securities into the marketplace provide the insurers the instruments to hedge some of the catastrophe risks they are facing. A catastrophe related security is tied to the prespecified catastrophe claims, while independent to oth...

Based on a robustness concept adapted from mathematical statistics, we investigate robust optimal investment strategies for worst-case crash scenarios when the maximum crash height is not known a priori. We specify an efficiency criterion in terms of the certainty equivalents of optimal terminal wealth and explicitly solve the investor’s portfolio problem for crra risk preferences. We also stud...

We study the problem of portfolio optimization in an incomplete market using derivatives as well as basic assets such as stocks. In such markets, an investor may want to use derivatives, as a proxy for trading volatility, for instance, but they should be traded statically, or relatively infrequently, compared with assumed continuous trading of stocks, because of the much larger transaction cost...

We analyze the influence of tax progression on optimal investment policy and its value. We show that three possible optimal regimes arise, depending on the nature of the tax policy. If the exogenously given progression threshold lies between the optimal capital stocks in the case of higher and lower marginal profit taxes, then the optimal investment policy is independent of profit tax rates. Bu...