Models with event risk (the possibility of sudden large price movements) have proven important for option pricing (e.g., Bates (1996))and optimal portfolio selection (e.g., Liu, Longstaff and Pan(2003)). However, most of the existing studies ignore transaction costs which are prevalent in almost...

Contrary to the prediction of standard portfolio diversification theory, most investors place a large fraction of their stock investment in a small number of stocks. We show that underdiversification may be caused by risk control. The key assumption is that investors are portfolio insurers who...

Conflicts of interest between insiders (e.g, controlling shareholders) and outsiders (e.g., minority shareholders) are central to the analysis of modern corporation. In an integrated continuous-time contingent claims framework with imperfect corporate governance, we examine a controlling...

Bilateral supply contracts are widely used despite the presence of spot markets. In this paper we provide a potential explanation for this prevalence of supply contracts even when spot markets are liquid and without delivery lag. Specifically, we consider the determination of an equilibrium...

We consider the optimal portfolio selection problem for a constant relative risk aversion (CRRA) investor who derives utility from his terminal wealth. The stock returns are predictable, but the predictive variables are only periodically observable with noise. We obtain the investor's value...

Retirement flexibility and inability to borrow against future labor income can significantly affect optimal consumption and investment. With voluntary retirement, there exists an optimal wealth-towage ratio threshold for retirement and human capital correlates negatively with the stock market...

Costly information acquisition makes it rational for investors to obtain important economic news only with limited frequency or limited accuracy. We show that this rational inattention to important news may make investors overinvest or underinvest. In addition, the optimal trading strategy is...

Most existing portfolio choice models ignore the prevalent periodic market closure and the fact that market volatility is significantly higher during trading periods. We find that market closure and the volatility difference across trading and nontrading periods significantly change optimal...

In this paper, we use a simple model to illustrate that the existence of a large, negative wealth shock and insufficient insurance against such a shock can potentially explain both the limited stock market participation puzzle and the low-consumption-high-savings puzzle that are widely...

Most existing portfolio choice models ignore periodic market closure and the fact that market volatility is significantly higher during trading periods. We show that market closure and the volatility difference across trading and nontrading periods significantly change optimal trading strategies...