We propose a new approach to model the cost of liquidity based on the synthetic replication of the sale of a liquid asset. Assuming that markets are complete, the sale of a liquid asset can be replicated by a) taking the decision to sell an illiquid asset and effectively sell it at a later date...

The Taylor rule (1993) states that Fed funds rates have an inflation beta equal to 1.5. If equity investors infer their long-term discount rate based upon guidance from the Federal Reserve using the Taylor rule, then earnings yields should display a positive beta to inflation. This provides a...

This paper analyzes the optimal asset allocation of an investor facing both interest rate risk and estimation risk. We assume that the short-term interest rate is stochastic and the expected market return is given by the interest rate plus an unknown excess market return. We show that his...

This paper shows a simple approach to the pricing of options on spread and some arguments in favor of modelling the spread using its two components instead of the spread itself.

This paper presents a simple approach to the pricing of options on spread and some arguments in favor of modelling the spread using its two components instead of the spread itself. We show that, even in a simple Gaussian setting, the spread should not be modelled directly, and that convergence...