In this article, we show how to analyze analytically the equilibrium policies and prices in an economy with a stochastic investment opportunity set and incomplete financial markets, when agents have power utility over both intermediate consumption and terminal wealth, and face portfolio constraints. The exact local comparative statics and approximate but analytical expression for the portfolio ...

We propose a general equilibrium model with multiple assets able to match both the time series and the cross-sectional predictability of stock returns. The cross section of average returns is determined by both cash-flow risk and discount risk. We show that if cross-sectional differences in average returns are mainly determined by discount risk, then a counterfactual prediction obtains: Assets ...

Hong Kong Rachel Hardee +852 2263 9918 rachel.hardee @derivativefitch.com Introduction Constant proportion debt obligations (CPDOs) are one of the latest product innovations seen in the structured credit markets. Like other more recent structured credit products, the performance of the issued debt obligations is highly dependent on the mark-to-market (MtM) impact of changes in credit spreads. C...

We find that an option-based equity tail risk factor is priced in the cross section of currency returns; more exposed currencies offer a low premium because they hedge against risk. A portfolio buys with high beta and shorts those extracts global component factor. The estimated price this novel consistently negative carry momentum portfolios, portfolios other asset classes, suggesting excess re...

There exist two separate branches of finance that require advanced quantitative techniques: the "Q" area of derivatives pricing, whose task is to "extrapolate the present"; and the "P" area of quantitative risk and portfolio management, whose task is to "model the future". We briefly trace the history of these two branches of quantitative finance, highlighting their different goals and challeng...

While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time-varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk-free rates, predictable risk premiums, and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analy...

Tests of the CAPM, the prototype model of equilibrium in financial markets, are usually based on returns computed from end-of-month closing prices. It is reasonable to doubt that these prices always reflect markets that are at equilibrium, thus raising the question whether and how inference is biased. Rather than exploring this issue using one of the many theoretical (but empirically unverified...

Evidence indicates that people fear change and the unknown. We model this behavior as familiarity bias in which individuals focus on adverse scenarios in evaluating defections from the status quo. The model explains portfolio underdiversification, home and local biases. More importantly, equilibrium stock prices reflect an unfamiliarity premium. In an international setting, our model predicts t...

This paper considers a multi-objective portfolio selection problem imposed by gaining of portfolio, divided yield and risk control in an ambiguous investment environment, in which the return and risk are characterized by probabilistic numbers. Based on the theory of possibility, a new multi-objective portfolio optimization model with gaining of portfolio, divided yield and risk control is propo...

The reaction of closed-end fund share prices to changes in portfolio values is on average the same whether funds are trading at discounts or premia and whether the changes in portfolio values are positive or negative. If closed-end fund discounts and premia do correctly measure investor sentiment, then these results suggest that investor sentiment does not affect the market’s reaction to news a...