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...

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 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...

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...

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...

This paper introduces a tractable, structural model of subjective beliefs. Since agents that plan for the future care about expected future utility flows, current felicity can be increased by believing that better outcomes are more likely. On the other hand, expectations that are biased towards...

Weather variables, and sunshine in particular, are found to be strongly correlated with financial variables. I consider self-reported happiness as a channel through which sunshine affects financial variables. I examine the influence of happiness on risk-taking behavior by instrumenting...

Do asset prices affect real activity? This question has taken on a new importance in recent years, as asset values first surged at the end of 1990s and, thereafter, dramatically retreated. This report reviews the available theoretical and empirical evidence regarding asset price and wealth...

This paper extends the model with narrow framing suggested by Barberis and Huang (2009) to also account for probability weighting and a convex-concave value function in the specification of cumulative prospect theory preferences on narrowly framed assets. We show that probability weighting is...