In this paper we will state the fundamental principles of the gauge approach to financial economics and demonstrate the ways of its application. In particular, modeling of real pricing processes will be considered for an example of S&P500 market index. Derivative pricing and portfolio theory are also briefly discussed.

The purpose of this paper is to show that modern control theory, both in the form of the “classical” ideas developed in the 1950s and 1960s, and in that of later, more recent methods such as the “nonsmooth,” “very nonsmooth” and “differentialgeometric” approaches, provides the best and mathematically most natural setting to do justice to Johann Bernoulli’s famous 1696 “brachistochrone problem.”...

HKJGOM 2005; 5 (1) 40 Introduction In modern days, birth control in our community has been achieved with modest success via the practice of various contraceptive methods. According to statistics from The Family Planning Association of Hong Kong (FPAHK), the contraceptive practice rate in Hong Kong has been maintained at above 80% since 19871. This is higher than the world average of 60%2. Famil...

of the Dissertation Three Essays on Asset Pricing, Portfolio Choice and Behavioral Finance.

This paper analyzes the investment decisions of insured banks under fixed-rate deposit insurance. The model takes into account the charter value and allows banks to dynamically revise their asset portfolios. Trade-offs exist between preserving the charter and exploiting deposit insurance. The optimal bank portfolio problem is solved analytically for a constant charter value. In any audit period...

This paper, adopting the recursive multiple-priors utility, studies the optimal consumption and portfolio choice in a Merton-style model with anticipation when there is a difference between ambiguity and risk. The fundamental issue is what the effects of ambiguity and anticipation on the investor’s behavior are. In the case of a logarithmic felicity function, the paper also shows that no hedgin...

Let MPT (v, 2) denote a maximum packing of triples of order v and index 2. An MPT (v, 2) is called simple if it contains no repeated triples. It is proved in this paper that for v > 2 and any even 2, the necessary and sufficient condition for the embedding of a simple MPT(v,2) in a simple MPT(u,).) is u >/2v + 1.

Weighted utility models attempt to account for risk preferences in terms of an expectation-like equation applied to the subjective evaluation of probabilities and outcomes, while Portfolio theory assumes that risk preference is a function of expected value and perceived risk. A pair of empirical predictions which contrasts Portfolio theory with all weighted utility models is derived and tested....