We analyze the implications of the structure of a network for asset prices in a general equilibrium model. Networks are represented via self- and mutually exciting jump processes, and the representative agent has Epstein-Zin preferences. Our approach provides a flexible and tractable unifying...

We consider an asset allocation problem in a continuous-time model with stochastic volatility and jumps in both the asset price and its volatility. First, we derive the optimal portfolio for an investor with constant relative risk aversion. The demand for jump risk includes a hedging component,...

We consider a Lucas-type exchange economy with two heterogeneous stocks (trees) and a representative investor with constant relative risk aversion. The dividend process for one stock follows a geometric Brownian motion with constant and known parameters. The expected dividend growth rate for the...

Since trading cannot take place continuously, the optimal portfolio calculated in a continuous-time model cannot be held, but the investor has to implement the continuous-time strategy in discrete time. This leads to the question how severe the resulting discretization error is. We analyze this...

Empirical evidence shows that the implied volatility smiles for index options are significantly steeper than those for individual options. We propose a model setup where we start from the joint dynamics of the stocks and where the index value is a weighted sum of individual stock prices. Then...

Tests for the existence and the sign of the volatility risk premium are often based on expected option hedging errors. When the hedge is performed under the ideal conditions of continuous trading and correct model specification, the sign of the premium is the same as the sign of the mean hedging...

This paper deals with the problem of determining the correct risk measure for options in a Black–Scholes (BS) framework when time is discrete. For the purposes of hedging or testing simple asset pricing relationships previous papers used the "local", i.e., the continuous-time, BS beta as the...