We introduce heterogeneity in agents’ risk aversion into a general equilibrium asset pricing framework with recursive preferences. Agents trade in a stock, whose dividend is the only source of consumption, and in a short-term bond in zero net supply. In equilibrium the less risk averse agents...

This study finds that a model with internal habit memory allowsto simultaneously explain a series of business cycle and asset pricing puzzles. Compared to the literature, the equity premium puzzle can be resolved in a model with endogenous labor, without giving rise to excessive risk free rate...

We examine merger activity and its effect on asset pricing in a firm network economy. Mergers create internal capital markets which change the cash flow risk structure of the merging firms. We propose a solution concept for coalitional games without the superadditivity axiom, which extends...

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...

The aim of this study is to develop a general equilibrium framework linking real estate prices to the real economy. The model is evaluated in terms of its ability to explain: (i) the high volatility of residential real estate prices, (ii) the fact that commercial real estate prices are more...

This paper complements theoretical studies on the Kelly rule in evolutionary finance by studying a Darwinian model of selection and reproduction in which the diversity of investment strategies is maintained through genetic programming. We find that investment strategies which optimize long-term...

The aim of this paper is to explain why cross-sectional estimated migration correlations displayed in the academic and professional literature can be either not consistent, or inefficient, and to discuss alternative approaches. The analysis relies on a model with stochastic migration in which...

In this paper we explain how to use rating histories provided by the internal scoring systems of banks and by rating agencies in order to predict the future risk of a set of borrowers. The method is developed following the steps suggested by the Basle Committee. To introduce both migration...

The prospect theory of Kahneman and Tversky (1979) and the cumulative prospect theory of Tversky and Kahneman (1992) are descriptive models for decision making that summarize several violations of the expected utility theory. This paper gives a survey of applications of prospect theory to the...

We develop an algorithm to compute asset allocations for Kahneman and Tversky's (1979) prospect theory. An application to benchmark data as in Fama and French (1992) shows that the equity premium puzzle is resolved for parameter values similar to those found in the laboratory experiments of...