We apply perturbation theory to solve the optimal control problem of an investor with time-additive power utility over intermediate consumption and final wealth. Under general conditions we show existence of a power series representation for the prevailing optimal consumption and investment...

We apply perturbation methods to solve in closed form a class of robust control problems, implied by Anderson, Hansen and Sargent setting of a preference for robustness. In the constant investment opportunity set case, we obtain closed form power series solutions for the arising robust Bellman...

We solve analytically the Merton's problem of an investor with time-additive power utility. For general state dynamics, we prove existence of two power series representations of the relevant optimal policies and value functions, which hold for all admissible risk aversion parameters. We...

This paper shows that in financial markets with endogenous asset supply and demand, both rational and noise traders do coexist in the long run. The finding implies that financial markets are neither informationally nor allocationally efficient. While rational traders have a consistently higher...

This paper studies modelling and existence issues for market models of stochastic implied volatility in a continuous-time framework with one stock, one bank account and a family of European options for all maturities with a fixed payoff function h. We first characterize absence of arbitrage in...

This paper studies the term structure implications of a simple structural economy in which the representative agent displays ambiguity aversion, modeled by Multiple Priors Recursive Utility. Bond excess returns reflect a premium for ambiguity, which is observationally distinct from the risk...

With increasing appreciation of the fact that stock return variance is stochastic and variance risk is heavily priced, the industry has created a series of variance derivative products to span variance risk. The variance swap contract is the most actively traded of these products. It pays at...

This paper analyzes the term structure of interest rates in an exchange-only Lucas (1978) economy where consumers learn about a stochastic growth rate through observations of the endowment process and an external public signal. We allow for deluded consumers, who exaggerate the degree of...

This paper provides regime-switching stochastic volatility extensions of the LIBOR market model. First, the instantaneous forward LIBOR volatility is modulated by a continuous time homogeneous Markov chain. In a second parameterization, the volatility is modelled by a square root process with a...

The challenge of international term structure models is to simultaneously account for the properties of interest rate term structures and foreign exchange rates within an arbitrage-free framework. We extend the quadratic term structure models proposed in Leippold and Wu (2002) to multiple...