We develop a dynamic portfolio choice model with illiquid alternative assets to analyze the “endowment model,” widely adopted by institutional investors, such as pension funds, university endowments, and sovereign wealth funds. In model, asset has lockup but can be liquidated at any time paying proportional cost. how investors engage in liquidity diversification investing multiple staggered exp...

Most tests of asset pricing models address only the pricing predictions – perhaps because the portfolio choice predictions are obviously wrong. But how can asset-pricing theory be right if the portfolio choice theory on which it rests is wrong? This work builds and observes experimental markets in which risky and riskless assets are traded. Risk aversion is a robust phenomenon in experimental s...

Portfolio insurance is based on the principal of risk transfer i.e., one person’s protection is another person’s liability. The cost of portfolio insurance is the mechanism to equilibrate its demand with supply. In the theory of finance minimum-cost portfolio insurance has been characterized as a very important investment strategy. In this chapter, we discuss the investment strategy called mini...

The purpose of these lectures is to offer an overview of Stochastic Portfolio Theory, a rich and flexible framework for analyzing portfolio behavior and equity market structure. This theory was developed in the book by E.R. Fernholz (Stochastic Portfolio Theory, Springer 2002) and was studied further in the papers Fernholz (Journal of Mathematical Economics, 1999; Finance & Stochastics, 2001), ...

We consider the dynamic portfolio choice problem in a jump-diffusion model, where an investor may face constraints on her portfolio weights: for instance, no-short-selling constraints. It is a daunting task to use standard numerical methods to solve a constrained portfolio choice problem, especially when there is a large number of state variables. By suitably embedding the constrained problem i...

The research on computational advertising so far has focused on finding the single best ad. However, in many real situations, more than one ad can be presented. Although it is possible to address this problem myopically by using a single-ad optimisation technique in serial-mode, i.e., one at a time, this approach can be ineffective and inefficient because it ignores the correlation between ads....

We derive asset-pricing and portfolio-choice implications of a dynamic incomplete-markets model in which consumers are heterogeneous in several respects: labor income, asset wealth, and preferences. In contrast to earlier papers, we insist on at least roughly matching the model’s implications for heterogeneity—notably, the equilibrium distributions of income and wealth—with those in U.S. data. ...