This paper investigates the presence of bull and bear market states in stock price dynamics. A new definition of bull and bear market states based on sequences of stopping times tracing local peaks and troughs in stock prices is proposed. Duration dependence in stock prices is investigated...

We analyze the properties of a bias-corrected realized variance (RV) in the presence of iid market microstructure noise. The bias correction is based on the first-order autocorrelation of intraday returns and we derive the optimal sampling frequency as defined by the mean squared error (MSE)...

This paper shows that the best known empirical biases of the Black and Scholes (1973) option pricing formula can be explained by investors learning the parameters of the underlying fundamental process. In the context of an equilibrium model where dividend news evolve on a binomial lattice we...

Evaluation of forecast optimality in economics and finance has almost exclusively been conducted under the assumption of mean squared error loss. Under this loss function optimal forecasts should be unbiased and forecast errors should be serially uncorrelated at the single period horizon with...

This paper studies optimal asset allocation to stocks, long-term bonds and T-bills and consumption choice in the presence of regime switching in asset returns. Optimal asset allocations vary considerably across four states - both across bonds and stocks and among large and small stocks - and...

Survey data on expectations frequently find evidence that forecasts are biased, rejecting the joint hypothesis of rational expectations and symmetric loss. While the literature has attempted to explain this bias through forecasters' strategic behavior, we propose a simpler explanation based on...