Decision-makers typically rely on informative starting points that are somewhat incorrect and then attempt to make appropriate adjustments. Such reliance on informative starting points may be an optimal response of a Bayesian decision-maker who faces finite computational resources (Lieder et al...

We model a scenario in which there are three types of investors: fundamentalists, speculators, and trend-followers and an intermediary who cares about his reputation. Fundamentalists are rational investors with long horizons who are interested in the dividend stream. Speculators are rational...

We develop a discrete-time affine stochastic volatility model with time-varying conditional skewness (SVS). Importantly, we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way. Our approach allows current asset returns to be asymmetric conditional on...

Based on experimental evidence, I adjust the standard currency option pricing models for the anchoring heuristic of Tversky and Kahneman (1974). Anchoring provides an explanation for the market practice of using risk-reversals as sentiment proxy. While generating currency smiles even with...

What happens when the anchoring and adjustment heuristic of Tversky and Kahneman (1974) is incorporated in currency option models? Surprisingly, it generates the peculiar features of currency smiles within the Black-Scholes framework, while adding power to stochastic volatility and jump...

What happens when the anchoring and adjustment heuristic of Tversky and Kahneman (1974) is incorporated in currency option models? Surprisingly, it generates the peculiar features of currency smiles within the Black-Scholes framework, while adding power to stochastic volatility and jump...

Risk-averse expected utility maximization implies that the pricing kernel must be a non-increasing function of aggregate wealth. However, empirical research has found that the pricing kernel frequently displays a locally increasing portion in aggregate wealth. This is known as the pricing kernel...

Advances in variance analysis permit the splitting of the total quadratic variation of a jump-diffusion process into upside and downside components. Recent studies establish that this decomposition enhances volatility predictions, and highlight the upside/downside variance spread as a driver of...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...

A common reasoning process is to rely on an informative starting point which is somewhat incorrect and then attempt to adjust it appropriately. Evidence suggests that underlying stock volatility is such a starting point, which is scaled-up to estimate call option volatility. I adjust...