When modeling valuation under uncertainty, economists generally prefer expected utility because it has an axiomatic foundation, meaning that the resulting choices will satisfy a number of rationality requirements. In expected utility theory, values are computed by multiplying probabilities of...

The acknowledged importance of uncertainty in economic decision making has stimulated the search for neural signals that could influence learning and inform decision mechanisms. Current views distinguish two forms of uncertainty, namely risk and ambiguity, depending on whether the probability...

Many real-world markets are competitive only in smalls, taken to mean that price taking applies only to small orders. Starting from this observation, a theory of equilibration is derived where orders are optimal merely in a local sense. Prices are assumed to adjust in the direction of the order...

We present experimental evidence that security prices do not respond to pressure from their own excess demand, unlike traditionally assumed in economic theory. Instead, prices respond to excess demand of all securities, despite the absence of a direct link between markets. We propose a model of...

We analyze theoretically and empirically the implications of heterogeneous information for equilibrium asset pricing and portfolio choice. Our theoretical framework, directly inspired by Admati (1985), implies that with partial information aggregation, portfolio separation fails, buy-and-hold...

Statistical model selection criteria provide an informed choice of the model with best external (i.e., out-of-sample) validity. Therefore, they guard against overfitting (quot;data snoopingquot;). We implement several model selection criteria in order to verify recent evidence of predictability...

An alternative explanation is suggested for the erratic behavior of otherwise significant z-statistics in tests of the profitability of simple trading strategies. It is not attributed to time-varying risk premia, but, instead, to a failure of the distributional theory in inefficient markets. In...

In one of the early attempts to model stochastic volatility, Clark [1973] conjectured that the size of asset price movements is tied to the rate at which transactions occur. To formally analyze the econometric implications, he distinguished between transaction time and calendar time. The present...

The cross-section of average annual returns on German common stock in the period of 1881-1913 exhibits several of the patterns that have been observed in more recent U.S. data. Market beta is hardly important, and its explanatory power is swamped by size and the ratio of book value to market...

We report on six large-scale financial markets experiments that were designed to test two of the most basic propositions of modern asset pricing theory, namely, that the interaction between risk averse agents in a competitive market leads to equilibration, and that, in equilibrium, risk premia...