This paper extends the method of discounted cash flows to value investment projects through incorporating real options. It is assumed the cash flows generated by the firm are correlated with macroeconomic fundamentals, particularly with the interest rate. It is also assumed that the cash flows...

This research develops, under the assumption of complete markets, a stochastic model that explains the decision making process of a rational consumer-investor selecting a portfolio in a market risk environment subject to his budget constraint. The proposed model is developed in the framework of...

The aim of this paper is to show the convenience of using mathematical tools from quantum mechanics to solve some financial problems. In particular, the Vasicek short-rate model in continuous time is discussed in the framework of the Feynman path integral. To do this, the Lagrangian of the...

This paper develops, under the framework of a small, open, and monetary economy, a stochastic model of inflation stabilization taking as a nominal anchor the exchange rate when credibility is imperfect. The agents have expectations driven by two processes: a diffusion-jump process for the...

The use of equilibrium models in economics springs from the desire for parsimonious models of economic phenomena that take human reasoning into account. This approach has been the cornerstone of modern economic theory. We explain why this is so, extolling the virtues of equilibrium theory; then...

En este articulo se presenta de manera completa, rigurosa y compacta, la teoria clasica de las finanzas (TF). No pretende introducir teoremas novedosos, sino solo entretejerlos usando un metodo que nunca ha sido utilizado en la demostracion de representaciones de utilidad: el teorema de Tarski...

We use a repeated survey of an Italian bank's clients to test whether investors' risk aversion increases following the 2008 financial crisis. We find that both a qualitative and a quantitative measure of risk aversion increases substantially after the crisis. After considering standard...

We evaluate lifecycle consumption and portfolio allocation patterns resulting from access to Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuities, one of the most rapidly-growing financial innovations over the last two decades. A key feature of these products is that they offer access...

While financial knowledge is strongly positively related to household wealth, there is also considerable cross-sectional variation in both financial knowledge and net asset levels. To explore these patterns, we develop a calibrated stochastic life cycle model featuring endogenous financial...

Household decisions are profoundly shaped by a complex set of financial options due to Social Security rules determining retirement, spousal, and survivor benefits, along with benefit adjustments that vary with the age at which these are claimed. These rules influence optimal household asset...