We study the perpetual American call option pricing problem in a model of a financial market in which the firm issuing a risky asset can regulate the dividend rate by switching it between two constant values. The firm dividend policy is unknown for small investors who can only observe the prices available from the market. The asset price dynamics are described by a geometric Brownian motion wit...

This paper examines how an asset price is determined in a market, and how it changes as circumstances in the market change, making use of a standard asset price model. The motivation of the paper is to examine if the model can explain a bubble economy in which individuals are risk averse. It is known that if the relative risk aversion of an investor’s utility function does not exceed 1 and is n...

If investors are not fully rational, what can smart money do? This paper provides an example in which smart money can strategically take advantage of investors’ behavioral biases and manipulate the price process to make profit. The paper considers three types of traders, behavior-driven investors who are less willing to sell losers than to sell winners (dispositional effect), arbitrageurs, and ...

This paper examines the valuation of risky projects in a setting where the investor’s probability estimates for future states of nature are ambiguous and where he or she can invest both in a portfolio of projects and securities in financial markets. This setting is relevant to investors who allocate resources to industrial research and development projects or make venture capital investments wh...

We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm’s risk premium is a function of both the firm’s exposure to a common risk factor and idiosyncratic characteristics of the firm’s information environment. We show tha...

Alternative assets, such as private equity, hedge funds, and real assets, are illiquid and opaque, and thus pose a challenge to traditional models of asset allocation. In this paper, we study asset allocation and asset pricing in a generalequilibrium model with liquid assets and an alternative risky asset, which is opaque and incurs transaction costs, and investors who differ in their experienc...

INTRODUCTION* Following tradition, I deal here with the Capital Asset Pricing Model, a subject with which I have been associated for over 25 years, and which the Royal Swedish Academy of Sciences has cited in honoring me with the award of the Prize in Economic Sciences in Memory of Alfred Nobel. I first present the Capital Asset Pricing Model (hence, CAPM), incorporating not only my own contrib...

ions, pricing and other behavior is derived. Chapman and Polkovnichenko (2009) have recently shown that the lack of agent heterogeneity inherent in the representative agent approach may have important implications, particularly when the agent is not an expected utility maximizer. Specifically, these authors demonstrated that adding even one more agent to a market can qualitatively change the co...

Feedback effects from asset prices to firm cash flows have been empirically documented. This finding raises a question for asset pricing: How are asset prices determined if price affects fundamental value, which in turn affects price? In this environment, by buying assets that others are buying, investors ensure high future cash flows for the firm and subsequent high returns for themselves. Hen...

We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm׳s risk premium is a function of both the firm׳s exposure to a common risk factor and idiosyncratic characteristics of the firm׳s information environment. We show tha...