Transaction costs in trading involve both risk and return. The return is associated with the cost of immediate execution and the risk is a result of price movements during a more gradual trading. The paper shows that the trade-off between risk and return in optimal execution should reflect the...

One of the most striking portfolio puzzles is the %u201Cdisposition effect%u201D: the tendency of individuals to sell stocks in their portfolios that have risen in value since purchase, rather than fallen in value. Perhaps the most prominent explanation for this puzzle is based on prospect...

Optimal investment of firms implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment. Winners have higher expected growth and expected marginal productivity (two major components of the marginal benefit of...

Extreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets. Asset pricing and trading, in these cases, are intrinsically...

Contrary to the Black-Scholes model, volatilities implied by index option prices depend on the exercise price of the option and are often higher than realized volatilities. We explain both facts in the context of a model that can also explain the mean and volatility of equity returns. Our model...

We derive the effect of plausible deniability on asset risk premia in a dynamic setting with correlated firm values, systematic risk, and risk-averse investors. Firms optimally exercise American disclosure options, which are more valuable due to the possibility that other correlated firms may...

The optimal portfolio of a utility-maximizing investor trading in the S&P 500 index and cash, subject to proportional transaction costs, becomes stochastically dominated when overlaid with a zero-net-cost portfolio of S&P 500 options bought at their ask and written at their bid price in most...

We propose an empirical implementation of the consumption-investment problem using the martingale representation alternative to dynamic programming. Our method is based on the direct observation of state prices from options data. This greatly simplifies the investor's task of specifying the...

The widely-used estimator of Berry, Levinsohn and Pakes (1995) produces estimates of consumer preferences from a discrete-choice demand model with random coefficients, market-level demand shocks and endogenous prices. We derive numerical theory results characterizing the properties of the nested...

We apply numerical dynamic programming to multi-asset dynamic portfolio optimization problems with proportional transaction costs. Examples include problems with one safe asset plus two to six risky stocks, and seven to 360 trading periods in a finite horizon problem. These examples show that it...