We study the effect of introducing a nonredundant derivative on the volatilities of the stock market return and the locally risk-free interest rate. Our analysis uses a standard, frictionless, full-information, dynamic, continuous-time, general-equilibrium, Lucas endowment economy in which there...

We develop a model for an investor with multiple priors and aversion to ambiguity. We characterize the multiple priors by a "confidence interval" around the estimated expected returns and we model ambiguity aversion via a minimization over the priors. Our model has several attractive features:...

We evaluate the out-of-sample performance of the sample-based mean-variance model, and its extensions designed to reduce estimation error, relative to the naive 1-N portfolio. Of the 14 models we evaluate across seven empirical datasets, none is consistently better than the 1-N rule in terms of...

Two homogeneous stocks of physical capital are located in two different countries, separated by an "ocean." They are consumed by local residents, invested in a random production process yielding real returns, or transferred abroad. Under proportional transfer costs, trade, consumption, and...

When several investors with different risk aversions trade competitively in a capital market, the allocation of wealth fluctuates randomly among them and acts as a state variable against which each market participant will want to hedge. This hedging motive complicates the investors' portfolio...