Keywords: Robust optimization Mean–variance portfolio theory Ellipsoidal uncertainty Equilibrium price system a b s t r a c t In a financial market composed of n risky assets and a riskless asset, where short sales are allowed and mean–variance investors can be ambiguity averse, i.e., diffident about mean return estimates where confidence is represented using ellipsoidal uncertainty sets, we de...

In this paper, we propose a novel test of the 3M-CAPM under a positivity constraint on the estimated stochastic discount factor (SDF) and, more importantly, an upper bound on its volatility. The positivity constraint rules out arbitrage opportunities, while the restriction on SDF volatility rules out unduly large Sharpe ratios and is based on a sensible upper bound on investors’ risk aversion. ...

Rational expectations models make stringent assumptions on the agent’s knowledge about the true model. This paper introduces a model in which the rational agent realizes that using a given model involves approximation errors, and adjusts behavior accordingly. If the researcher accounts for this empirical rationality on part of the agent, the resulting empirical model assigns likelihood to the d...

The constant relative risk aversion (CRRA) type utility functions are used in consumption-based capital asset pricing models (C-CAPM) and are estimated by the generalized method of moments (GMM). More realistic hyperbolic absolute risk aversion (HARA) utility functions are analytically inconvenient. We show how to estimate HARA-based CCAPM models by employing Godambe-Durbin \estimating function...

Abstract This paper develops a simple new methodology to test financial market integration. Our technique is tightly based on a general intertemporal asset-pricing model, and relies on estimating and comparing expected discount rates across asset markets. Expected discount rates are allowed to vary freely over time, constrained only by the fact that they are equal across (riskadjusted) assets. ...

Under the assumption of normally distributed returns, we analyze whether the Cumulative Prospect Theory of Tversky and Kahneman (1992) is consistent with the Capital Asset Pricing Model. We find that in every financial market equilibrium the Security Market Line Theorem holds. However, under the functional form for the utility index suggested by Tversky and Kahneman (1992) financial market equi...

Starting from the reward-risk model for portfolio selection introduced in De Giorgi (2004), we derive the reward-risk Capital Asset Pricing Model (CAPM) analogously to the classical mean-variance CAPM. The reward-risk portfolio selection arises from an axiomatic definition of reward and risk measures based on few basic principles, including consistency with second order stochastic dominance. Wi...

In this paper we argue that implementing the income in the utility function can considerably contribute to the explanation of the equity premium puzzle. Macroeconomic data from developed and developing countries provides support to this idea. We propose a utility function that includes consumption, income and disentangles dividends as a specific form of income, and price assets using a consumpt...

We study a mean-variance capital asset pricing model (CAPM) in which investors have different probability beliefs about assets returns and different attitudes towards risk, all assets are risky, short-selling is allowed and satiation is possible. First, we prove that there exists a competitive equilibrium in the model under a rather general condition. This condition indicates a simple relations...

in this paper, the pricing of a european call option on the underlying asset is performed by using a monte carlo method, one of the powerful simulation methods, where the price development of the asset is simulated and value of the claim is computed in terms of an expected value. the proposed approach, applied in monte carlo simulation, is based on the black-scholes equation which generally def...