In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. However in most situations, corporate executives face incomplete markets either because they receive compensation packages...

In the standard real options approach to investment under uncertainty, agents formulate optimal policies under the assumptions of risk neutrality or perfect capital markets. Although the assumptions of risk neutrality or market completeness are crucial to the implications of the approach, they...

Theories of investment suggest that the option value of waiting to invest is significant in many branches of economics, where investment is irreversible. The existing literature has generally failed to account for the general equilibrium feedback effects of lumpy investments on optimal...

This paper analyzes the relation between agency conflicts and risk management in a contingent claims model of the firm. In contrast to previous contributions, our analysis incorporates not only stockholder-debtholder conflicts but also managerstockholder conflicts. In particular we consider a...

This paper analyzes the effects that uncertainty about economic fundamentalshas on aggregate trading volume. First, the trading volume of an investor facinga standard consumption portfolio choice problem is derived. It is found that if theparameters describing the investment opportunity set...

We conduct controlled experiments in order to analyze individual trading behavior. Our results suggest that investors measure their gains relative to their initial wealth, and that this reference point together with past stock price changes determine the portfolio choices. Subjects choose a...

The main contribution of this work is to provide a dynamic general equilibrium model of asset allocation, allowing to reconcile economic theory with several puzzling contradictions recently pointed out in the literature: (i) the asset allocation puzzle, (ii) the observed time-variation in...

Control problems with Recursive Multiple-Priors Utility (RMPU) are highly non-linear so that RMPU asset prices have been studied in very simple exchange economies only. We identify a continuous-time exchange equilibrium with Locally-Constrained-Entropy RMPU (LCE-RMPU) that is tractable even in...

This paper proposes a new wealth-dependent utility function for the inter-temporal consumption and portfolio problem, in which the subsistance (bliss) con-sumption level is a function of wealth. Ratchet effects obtain when higher wealth in-creases the subsistance consumption level; blas´...