We study consumption-portfolio and asset pricing frameworks with recursive preferences and unspanned risk. We show that in both cases, portfolio choice and asset pricing, the value function of the investor/representative agent can be characterized by a specific semilinear partial differential...

While it is common knowledge that portfolio separation in a continuous-time lognormal market is due to the basic properties of the Gaussian distribution, the usual textbook exposition relies on dynamic programming and thus Itô stochastic calculus and the appropriate regularity conditions. This...

We present comprehensive evidence in support of giving liquidity equal standing to size, value/growth, and momentum as investment styles, as defined by Sharpe (1992). First, we show that financial market liquidity, as identified by stock turnover, is an economically significant indicator of...

It is no secret that the rational expectations framework has endured what many consider to be a well deserved bashing. From problems, such as, ad hoc specifications of functional forms for utility functions, to adoption of utility functions as units of modeling, to absence of equilibriums that...

We study how transparency, modeled as information about one's counterparty liquidity needs, affects the functioning of an over-the-counter market. In our model, investors hedge endowment risk by trading bilaterally in a search-and-matching environment. We construct a bargaining procedure that...

While international portfolios are still heavily biased towards home assets, the home bias has exhibited a clear downward trend in the last few decades. Interestingly, the underlying rise in foreign investment has been primarily directed to just a handful of OECD countries, and has not given...

Standard strategic asset allocation procedures usually neglect market interaction. However, returns are not generated in a vacuum but are the result of the market's price discovery mechanism which is driven by investors' investment strategies. Evolutionary finance accounts for this and...

We introduce an evolutionary equilibrium asset pricing model with heterogeneous agents who can either act as brokers or hedge funds. Hedge funds can trade on margin, taking short or (leveraged) long positions in the assets. Brokers provide asset loans and credit to margin traders. In any...

A rational-expectations equilibrium with positive demand for financial information does exist under fully revealing asset price - contrary to a wide-held conjecture. Generalizing the common additive signal-return model with CARA utility to the family of distributions with moment generating...