Heterogeneous beliefs among market participants can lead to questionable speculative trading that goes beyond any risk-sharing motives. We demonstrate that such unwarranted betting behavior in market equilibrium can be mitigated by introducing nonlinear pricing for ambiguous contracts, without...

In this paper, we propose a method for hedge fund replication using a factor-based model supplemented with a series of risk and return constraints that implicitly target all the moments of the hedge fund return distribution. We use the approach to replicate the monthly returns of ten broad hedge...

Trading with futures is complex and abounds with risks, to mitigate which a multi-pronged approach such as diversification in different asset classes across dissimilar markets or imposing risk budgets on individual assets and/or asset classes or enforcing capital budgets and other investor...

We consider an investor who faces parameter uncertainty in a continuous-time financial market. We model the investor's preference by a power utility function leading to constant relative risk aversion. We show that the loss in expected utility is large when using a simple plug-in strategy for...

We study an optimal investment/consumption problem in a model capturing market and credit risk dependencies. Stochastic factors drive both the default intensity and the volatility of the stocks in the portfolio. We use the martingale approach and analyze the recursive system of nonlinear...