We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments, when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters,...

This paper studies the effects of introducing storable inputs into a general equilibrium model of endogenous growth. We explicitly account for an occasionally binding non-negativity constraint on storage. To solve the model, we rely on global non-linear solution methods, allowing us to make...

This paper studies asset pricing implications of heterogeneity across capital inputs. We build a general equilibrium model including two types of capital. The agents in our economy have Epstein and Zin (1989) preferences and technology is exposed to long-run risks in productivity growth....

We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments, when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters,...

We analyze the optimal insurance demand in a dynamic setup with two periods. In addition to the possibility to insure, the investor is allowed to transfer wealth between the two periods, i.e. she can save. While it is difficult to interpret the optimal saving and insurance decisions without...

This paper examines whether and how the popularity of portfolio insurance strategies can be justified theoretically. The analysis employs three different return generating processes with and without stochastic volatility and jumps. We find that an investor with constant relative risk aversion...

Variance contracts permit the trading of ’variance risk’, i.e. the risk that the realizedvariance of stock returns changes randomly over time. We discuss why investorsmight want to trade this type of risk, and why they might prefer a variance contractto standard calls and puts for this...

The observed prices of out-of-the money put options seem too high given standardderivative pricing models. One possible explanation is a Peso problem: crashes (forwhich the payoff of a put is high) are taken into account for pricing, but are under-represented in the data sets used for empirical...

This paper analyzes the properties of and the differences between derivative pricingmodels that include stochastic volatility or stochastic jumps or both of these riskfactors. The focus is on the pricing of European options. In a first step, we discussthe impact of the parameters in stochastic...

The vast majority of approaches to risk management, hedging, or portfolio planningassume that some model is given. However, under model risk, the true data gener-ating process is not known. The focus of this paper is on problems related to thehedging of derivative contracts. We explain the main...