Researchers studying the asset allocation problem for long-term investors have employed different investor criterion functions. Some analyses have been based on maximization of expected utility. The most commonly used utilities are quadratic utility, which yields the ubiquitous mean-variance...

The presence of a positive intercept (quot;alphaquot;) in a regression of an investment fund's excess returns on a broad market portfolio's excess return (as in the CAPM) and other quot;factorquot; portfolios' excess returns (e.g. the Fama and French factors) is frequently interpreted as...

This paper provides an alternative behavioral foundation for an investor's use of power utility in the objective function and its particular risk aversion parameter. The foundation is grounded in an investor's desire to minimize the objective probability that the growth rate of invested wealth...

The behavior of time averages, or functions of them, is important in quantitative research. Over an investment horizon, both the time-averaged number of loan defaults and the time-averaged log gross returns from securities investment, a.k.a. the continuously compounded cumulative rate of return...

Typical empirical methods training for finance Ph.D students emphasizes theory and application of statistical tools, augmented by study of empirical applications published in the academic journals. But newly minted faculty/authors will also have to cope with opinions of their administrative and...

We generalize the bankruptcy problem of resolving a debt owed to multiple creditors to financial networks, where there are multiple debtors and creditors. We show that some key Nash Bargaining results for the single debtor case do not generalize to financial networks

Empirical multifactor models of excess returns are theoretically grounded in Merton's ICAPM. Merton modeled investors who maximize expected utility of their own consumption. Multiple priced factors arise as “hedge portfolios” most closely correlated with state variables that drive...

The concept of entropy has a long and distinguished history in the physical sciences and engineering, in fields ranging from thermodynamics to image processing. Each of these applications employs a probability distribution that solves a relative entropy projection problem, i.e. an optimization...

Cramer's Large Deviation Theorem is used to formalize a modern time series variant of the quot;Safety-Firstquot;, loss aversion criterion, providing a behavioral foundation for a new portfolio performance index. When returns are normally distributed, the performance index is proportional to the...