We propose a new approach to optimal portfolio selection in a downside risk framework that allocates assets by maximizing expected return subject to a shortfall probability constraint, reflecting the typical desire of a risk-averse investor to limit the maximum likely loss. Our empirical results...

Using Canadian data, the consumption-based asset pricing model is studied, defined in terms of nondurable and durable goods consumption. A two-stage estimation procedure is used, which takes account of the presence of common stochastic trends in the forcing processes. This method yields more...

This paper addresses questions regarding the dimensionality of the stochastic discount factor and the selection of the best factors that enter it. We analyze these questions theoretically and empirically with a novel methodology which performs both (i) estimation of factor loadings and (ii) best...

This paper examines the preferred-habitat theory under time-varying risk aversion. The predicted positive relation between the term spread and relative supply of longer-term debt is stronger when risk aversion is high. To capture this effect, a time-varying coefficient model is introduced and...

We introduce the notion of realized copula. Based on assumptions of the marginal distributions of daily stock returns and a copula family, realized copula is defined as the copula structure materialized in realized covariance estimated from within-day high-frequency data. Copula parameters are...

We extend and adapt a class of estimators of the parameter H of the fractional Brownian motion in order to estimate the (time-dependent) memory function of a multifractional process. We provide: (a) the estimator's distribution when H ∈ (0,3/4); (b) the confidence interval under the null...

Two of the most important stylized facts well-known in finance relate to the non-Gaussian distribution and to the volatility clustering of stock returns. In this paper, we show that a new class of stochastic processes – called Multifractional Processes with Random Exponent (MPRE) – can...