Teaching Stochastic Finance on a basic level, e.g. to undergraduates or even in school is a task which is hard to fulfil with common continuous theory. It takes a lot of mathematical prerequisites, sometimes it is not even possible to introduce them since the level of education among students is too low. This is one of the main reasons for the use of discrete asset models to describe financial ...

Investors in alternative asset classes such as private equity and hedge funds have long had difficulty applying traditional models for making asset allocation decisions. The optimization techniques of modern portfolio theory rely heavily on a trio of descriptive statistics: mean, variance, and covariance. For most traditional asset classes, the abundance of historical data provides a guide for ...

The theory of general equilibrium with incomplete asset markets (GEI) studies the pricing of securities and commodities, and the interactions of perfectly competitive asset markets and commodity markets in determining consumption and investment. Since financial economics is fundamentally concerned with the pricing of securities, and since macroeconomics is fundamentally concerned with the real ...

Many tests of asset-pricing models address only the pricing predictions, but these pricing predictions rest on portfolio choice predictions that seem obviously wrong. This paper suggests a new approach to asset pricing and portfolio choices based on unobserved heterogeneity. This approach yields the standard pricing conclusions of classical models but is consistent with very different portfolio...

Brown and Gibbons [Brown, D.P., Gibbons, M.R., 1985. A simple econometric approach for utilitybased asset pricing model. Journal of Finance 40, 359–381], Karson et al. [Karson, M., Cheng, D., Lee, C. F., 1995. Sampling distribution of the relative risk aversion estimator: theory and applications. Review of Quantitative Finance and Accounting 5, 43–54], and Lee et al. [Lee, C.F., Lee, J.C., Ni, ...

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...

This paper discusses how to introduce liquidity into the well known mean-variance framework of portfolio selection using a representative sample of Spanish equity portfolios. Either by estimating mean-variance liquidity constrained frontiers or directly estimating optimal portfolios for alternative levels of risk aversion and preference for liquidity, we obtain strong effects of liquidity on op...