Anomalies found in tests of market efficiency do not necessarily imply that security prices do not reflect all available information, as the asset-pricing model used to describe the return generating process might also be false. In the present study, this joint hypothesis problem does not arise,...

Using a novel continuous-time framework, this paper explores the effects of illiquidity on portfolio dynamics and expected returns. In summary, the paper makes three key contributions to the existing literature on asset pricing and illiquidity. First, it illustrates that illiquidity leads to...

This paper examines the effect of equity investor sentiment on the bond market. While empirical evidence suggests that high investor sentiment leads to equity overvaluation, there is limited evidence of its effect on the bond market. Sentiment can have a negative impact on bond returns via two...

We introduce a portfolio friction in a two-country DSGE model where investors face a constant probability to make new portfolio decisions. The friction leads to a more gradual portfolio adjustment to shocks and a weaker portfolio response to changes in expected excess returns. We apply the model...

In asset management, the portfolio leverage affects performance, and can be subject to constraints and operational limitations. Due to the possible leverage aversion of the investors, the comparison between portfolio performances can be incomplete or misleading. We propose a procedure to...

An investment is a commitment of funds made in the expectation of some positive rate of return. A fundamental principle of investments is diversification, where investors diversify their investments into different types of financial assets. The different stocks can be clubbed in one portfolio....