infonet-economy

We propose a new modeling framework to study the asset pricing implications of learning under ambiguity aversion. In a continuous time partial information Lucas economy, we characterize analytically equilibrium equity returns and make the following observations. First, learning under ambiguity aversion implies an equilibrium discount for ambiguity, if and only if relative risk…

Structured financial products have gained more and more popularity in recent years, but nevertheless has their success so far not thoroughly been analyzed. In this article we develop a theoretical framework for the design of optimal structured products and analyze the maximal utility gain for an investor that can be achieved by introducing structured products. We demonstrate that…

We develop an algorithm to compute asset allocations for Kahneman and Tversky’s (Econometrica, 47(2), 263–291, 1979) prospect theory. An application to benchmark data as in Fama and French (Journal of Financial Economics, 47(2), 427–465, 1992) shows that the equity premium puzzle is resolved for parameter values similar to those found in the laboratory experiments of Kahneman and…

A new point estimator for the AR(1) coefficient in the linear regression model with arbitrary exogenous regressors and stationary AR(1) disturbances is developed. Its construction parallels that of the median--unbiased estimator, but uses the mode as a measure of central tendency. The mean--adjusted estimator is also considered, and saddlepoint approximations are used to lower the…

Both institutional and private investors often have only limited flexibility in timing their investment decision. They look for investments that will ideally be independent of the timing decision. In this article, a new class of derivative products whose payoff is linked to the trend of the underlying instrument is introduced. By linking the trend to the payoff, the timing of the…

In spite of the fact that they can draw on a larger, more liquid and more diversiedpool of capital than the equity of reinsurance companies, nancial markets have failedto displace reinsurance as the primary risk-sharing vehicle for natural catastropherisk. We show that this failure can be explained by dierences in information gatheringincentives between nancial markets and…

Shareholder agreements govern the relations among shareholders in privately held firms, such as joint ventures and venture capital-backed companies. We provide an economic explanation for key clauses in such agreements 14namely, put and call options, tag-along and drag-along rights, demand and piggy-back rights, and catch-up clauses. In a dynamic moral hazard setting, we show that…