We build a parsimonious agent-based model under the adaptive market hypothesis (AMH), which can explain the formation of equilibrium prices and market efficiency dynamics. Our model combines heterogeneous interacting agents, switching behavior, and investor feedback on past realized returns,...

Studies on financial markets have accumulated consistent evidences of stylized facts and anomalies, which can be characterized by stochastic switching among different co-existing market states but yet difficult to reconcile with traditionally rational expectation theory. When agents are...

This chapter puts forward a manual for how to setup and solve a continuous time model that allows to analyze endogenous (1) level and risk dynamics. The latter includes (2) tail risk and crisis probability as well as (3) the Volatility Paradox. Concepts such as (4) illiquidity and liquidity...

We analyze an environment where the uncertainty in the equity market return and its volatility are both stochastic and may be potentially disconnected. We solve a representative investor's optimal asset allocation and derive the resulting conditional equity premium and risk-free rate in...

We analyze an environment where the uncertainty in the equity market return and its volatility are both stochastic, and may be potentially disconnected. We solve a representative investor's optimal asset allocation and derive the resulting conditional equity premium and risk-free rate in...

The profitability of a trading system based on the momentum-like effects of price jumps was tested on the time series of 7 assets (EUR/USD, GBP/USD, USD/CHF and USD/JPY exchange rates and Light Crude Oil, E-Mini S&P 500 and VIX Futures), in each case for 7 different frequencies (ranging from...

Since portfolio management relies on the association of portfolio diversification, analyzing the spillover between the United States (US) and Asian-Pacific financial markets has become more critical. If Asian stock markets have low or negative correlations with each other and/or the US market,...

The asset allocation is a practical problem for most institutional and private investors, who routinely deal with a wide variety of stocks, bonds and options. Evidence suggests that both the expected return and the volatility vary over time. Many studies find that the expected returns have...