In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as “anomalies” the theory of rational finance cannot explain: (i) Predictability of asset returns; (ii) The Equity Premium; (iii) The Volatility Puzzle. We offer resolutions of...

In this paper, we combine modern portfolio theory and option pricing theory so that a trader who takes a position in a European option contract and the underlying assets can construct an optimal portfolio such that at the moment of the contract's maturity the contract is perfectly hedged. We...

Various studies report that investing in “sin stocks”, that is firms which make money from human vice, such as alcohol, tobacco, gambling and weapons, has historically delivered significantly positive abnormal returns. This finding has inspired the hypothesis that sin stocks are being...

The stochastic-alpha-beta-rho (SABR) model has become the dominant interest rate model used by practitioners. The principal effect of the parameter beta in the model is the effect on the skew, reflecting the belief option traders have about the distribution of the option's underlying. This paper...

The results suggest that the beta systematic risk measure calculated with the well-known single index market model (SIMM) may be a random coefficient. This would explain why the average NYSE stock has less than half of its total risk explained by market forces — the true beta is moving...