Assuming that probabilities (capacities) of events are random, this paper introduces a novel model of decision making under ambiguity, called Shadow probability theory, a generalization of the Choquet expected utility. In this model, probabilities of observable events in a subordinated...

We build regression trees to determine which firm characteristics are most likely to drive future returns. Out of 30 attributes, those related to momentum appear to have, by far, the most marked impact. This prominence is verified at the sector level as well. The second order effects are...

This paper introduces a model-free decomposition of S&P 500 forward market index returns in terms of realized and implied dispersion, downside, and tail risk using option portfolios. The decomposition lends itself by construction to learn about the different sources of risk in the market return,...

In this paper we consider a general class of diffusion-based models and show that, even in the absence of an Equivalent Local Martingale Measure, the financial market may still be viable, in the sense that strong forms of arbitrage are excluded and portfolio optimisation problems can be...

For years, research has been conducted to correctly model and predict the risk and return structures of Private Equity (PE) funds. Although past research has revealed valuable insight into the features of those funds, most risk and return model struggle with the dispersion of PE funds' returns,...

The capital asset pricing model (CAPM) for a security is a linear relationship between the expected excess return of the security and the expected excess return of the market. It was developed by William Sharpe, John Lintner and Jan Mossin. It is a useful framework to discuss idiosyncratic and...

Understanding the factors that drive the stock market is more than an academic exercise. With a framework to understanding what that drives the overall market, business leaders are positioned to drive value their own businesses. While driving increases in shareholder value is one of the most...

Recent evidence indicates that market model alphas are stronger predictors of mutual fund flows than alphas with other models. Berk and van Binsbergen (2016) claim that this evidence indicates CAPM is the best asset pricing model but Barber, Huang and Odean (2016) (BHO) claim it is evidence...

The Modern Portfolio Theory (MPT) has been the cornerstone of the asset allocation for over 40 years. In the past decade though, it led in a rather systematic way to bad investments decisions. One of MPT's main assumptions, investor risk aversion that translates into volatility aversion, biases...

The CAPM is commonly used for an introduction of the equity cost in practice to calculate the corporate value, which is composed by the risk-free rate, equity market return and each respective beta. However, there is a fundamental complication between the risk, cost and return for the equity...