Risk in bank trading portfolios and its management are potentially important to the banks' soundness and to the functioning of securities and derivatives markets. In this paper, proprietary daily trading revenues of 6 large dealer banks are used to study the bank dealers' market risks using a...

A key criticism of the existing empirical literature on the risk-return relation relates to the relatively small amount of conditioning information used to model the conditional mean and conditional volatility of excess stock market returns. To the extent that financial market participants have...

Motivated from investment-based asset pricing, we propose a new factor model consisting of the market factor, a size factor, an investment factor, and a return on equity factor. The new factor model outperforms the Carhart four-factor model in pricing portfolios formed on earnings surprise,...

We introduce artificial intelligence pricing theory (AIPT). In contrast with the APT's foundational assumption of a low dimensional factor structure in returns, the AIPT conjectures that returns are driven by a large number of factors. We first verify this conjecture empirically and show that...

We provide the first tests to distinguish whether individual investors equally balance their overall portfolios (naïve portfolio diversification--NPD) or engage in naïve buying diversification (NBD)--equally balancing values in same-day purchases of multiple assets. We find NBD in purchases of...

Investor sophistication has lagged behind the growing complexity of retail financial markets. To explore this, we develop a dynamic model to study the interaction between obfuscation and investor sophistication. Taking into account different learning mechanisms within the investor population, we...

Over the past two decades international markets have become more open, leading to a common perception that global capital markets have become more integrated. In this paper, I ask what this integration and its resulting higher correlation would imply about the diversification potential across...

Nontrivial diversification possibilities arise when a factor model describes security returns. In this paper, we provide a comprehensive examination of the merits of various strategies for constructing basis portfolios that are, in principle, highly correlated with the common factors underlying...

Using an extensive new data set on U.S. and U.K.-traded closed- end funds, we examine the diversification benefits from emerging equity markets and the extent of their integration with global capital markets. To measure diversification benefits, we exploit the duality between Hansen-Jagannathan...

The benefits of international diversification have been recognized for decades. In spite of this, most investors hold nearly all of their wealth in domestic assets. In this paper, we construct new estimates of the international equity portfolio holdings of investors in the U.S., Japan, and...