We solve analytically a pure exchange general equilibrium model of heterogeneous beliefs with habit forming preferences. Equilibrium prices depend on three factors: (i) the habit formation parameter; ii) the degree of disagreement; iii) the dynamics of disagreement. We show that in the absence...

We show that a possible explanation for the widespread use of options in compensation contracts might be that they provide a way to screen executives. In particular, we consider the problem of a risk-neutral firm that tries to hire a risk-averse executive. There are several types of executives,...

We introduce a model that captures the main properties that characterize employee stock options (ESO), in particular, the likelihood of early voluntary exercise and the obligation to exercise immediately if the employee leaves the firm, except if this happens before options are vested, in which...

We propose the use of a new option which we call quadratic, and that central banks could use to smooth exchange rate volatility through the hedging strategies of the issuers. We derive analytic pricing and hedging formulas. We suggest a criterion to derive the optimal (for the Central Bank)...

Top sportsmen often refer to competition against other top sportsmen as a motivation to exert more effort. We examine whether a similar pattern exists among another group of top professionals – star analysts. Our evidence suggests that star analysts concentrate their efforts and generate...

We conduct a controlled laboratory experiment in which subjects dynamically choose to allocate their portfolio between (i) a safe asset, (ii) a risky asset and (iii) a skewed asset with negative expected value (a bet ), in an environment where they can sometimes choose to acquire some...

We show that benchmark-linked convex incentives can lead risk-averse money managers aware of mispricing to over-invest in overpriced securities. In the model, the managers' risk-seeking behavior varies in response to the interaction of mispricing with convexity and benchmarking concerns....

We develop a model of risk-averse forecasters whose relative performance evaluation provides strategic misreporting incentives. Benchmarking against peers' performance results in herd behavior to avoid underperformance; a winner-take-all contest leads to deviations from peers. Uncertainty...

In this paper we investigate the negative relationship between analysts' coverage and stocks idiosyncratic volatility. While prior research argues that analysts cause the low level of idiosyncratic risk because they lack access to firm-specific information we hypothesize that the causal relation...