This paper provides a novel five-component decomposition of optimal dynamic portfolio choice. It reveals the simultaneous impacts from market incompleteness and wealth-dependent utilities. The decomposition leads to implementation via either closed-form solutions or Monte Carlo simulations. With...

We prove that under very weak conditions optimal financial products have to be co-monotone with the inverted state price density. Optimality is meant in the sense of the maximization of an arbitrary preference model, e.g. Expected Utility Theory or Prospect Theory. The proof is based on methods...

Using properties of the cdf of a random variable defined as a saddle-type point of a real valued continuous stochastic process, we derive first-order asymptotic properties of tests for stochastic spanning w.r.t. a stochastic dominance relation. First, we define the concept of Markowitz...

We develop and implement methods for determining whether introducing new securities or relaxing investment constraints improves the investment opportunity set for prospect investors. We formulate a new testing procedure for prospect spanning for two nested portfolio sets based on subsampling and...

The paper rst shows that nancial market equilibria need not to exist if agents possesscumulative prospect theory preferences with piecewise-power value functions. This is due tothe boundary behavior of the cumulative prospect theory value function, which might causean innite short-selling...

The paper first shows that financial market equilibria need not to exist if agents possess cumulative prospect theory preferences with piecewise-power value functions. This is due to the boundary behavior of the cumulative prospect theory value function, which might cause an infinite...

We study a number of large international military conflicts since World War II where we establish a news analysis as a proxy for the estimated likelihood that the conflict will result in a war. We find that in cases when there is a pre-war phase, an increase in the war likelihood tends to...

We develop a new approach for evaluating performance across hedge funds. Our approach allows for performance comparisons between models that are misspecified – a common feature given the numerous factors that drive hedge fund returns. The empirical results show that the standard models used in...

We develop a novel approach to jointly examine skill, scale, and value added across individual funds. We find that the value added is (i) positive for the vast majority of funds, and (ii) close to its optimal level after an adjustment period possibly due to investors' learning. We also show that...

We use constrained cross-section regressions to disentangle the effects of various factors on international real estate security returns. Besides a common factor, pure country, property type, size, and value/growth factors are considered. The value/growth measure that is used in this paper...