We propose a method to integrate frequentist and subjective probabilities in order to obtain a coherent asset allocation in the presence of stress events. Our working assumption is that in normal market asset returns are sufficiently regular for frequentist statistical techniques to identify...

We propose a method to integrate frequentist and subjective probabilities in order to obtain a coherent asset allocation in the presence of stress events. Our working assumption is that in normal market asset returns are sufficiently regular for frequentist statistical techniques to identify...

In this paper I discuss financial models created to price complex derivatives. I argue that their development can only be understood with reference to the purposes for which they have been created, and to the institutional environment in which they have evolved. I show via stylized computer...

In this note I concisely present the main arguments advanced in "Taking Liberties" (2012). In particular, I look at the philosophical roots of libertarian paternalism. I examine whether the claims that it constitutes the "real Third Way" and that it always should be preferred to 'harder' forms...

We show how the most likely deformation can be assigned to a yield curve, consistent with subjetive views on a handful of key rates. We provide an inutive explanation for the solution, which is perhaps not what one might at first blush have expected. We draw analogies from physics that...

We introduce Kinetic Component Analysis (KCA), a state-space application that extracts the signal from a series of noisy measurements by applying a Kalman Filter on a Taylor expansion of a stochastic process. We show that KCA presents several advantages compared to other popular noise-reduction...

Recent studies claim that a new generation of return-predicting factors can predict excess returns in the US Treasury market far better than the slope-related factors. The new-generation factors are, however, often difficult to interpret and far less parsimonious, and therefore doubts have been...

We examine whether the predictability and business-cycle dependence of excess returns in US Treasuries can be more naturally explained in terms of state-dependent risk premia or a specific cognitive bias (representativeness). We show that the extremely parsimonious cognitive-bias model in...

In this paper we provide an operational definition of market and funding liquidity, and we introduce a method to create two interpretable liquidity measures, which we associate to these two types of liquidity. The construction is based on creating two parsimonious linear combinations of the many...

We present an essentially affine model with pricipal components as state variables. We show that, once no-arbitrage is imposed, this choice of state variables imposes some unexpected constraints on the reversionspeed matrix, whose N2 elements can be uniquely specified by its N eigenvalues. The...