We relate wealth redistribution, asset pricing, and trade in financial assets by introducing heterogeneous agents into a Lucas tree-model. Heterogeneity of agents causes trade in financial assets and dynamic wealth redistribution. When consumers have time-separable, constant elasticity utilities...

An extensive cheapest-to-deliver (CTD) literature has become mired in the misconception that the CTD is characterizable in terms of duration. We show that exceptions to the duration rule contain many economically relevant scenarios. Our conclusions may be summarized as follows: 1. Independent of...

This paper examines two issues which are not addressed or have caused some confusion in the hedging literature. We first derive general conditions under which forward and/or put unbiasedness occurs. Contrary to the traditional belief that unbiasedness occurs under risk-neutrality only, we show...

Significant computational simplification is achieved when option pricing is approached through the change of numeraire technique. By pricing an asset in terms of another traded asset (the numeraire), this technique reduces the number of sources of risk that need to be accounted for. The...

The uncertainty premium is the premium that is derived from not knowing the sure outcome (risk premium) and from not knowing the precise odds of outcomes (ambiguity premium). We generalize Pratt's risk premium to uncertainty premium based on Klibanoff, Marinacci and Mukerji (2005) smooth model...

We present a discrete time model of expected bond returns (EBR). These are ex-ante expectations implied by the market prices and the data set available when bond prices are quoted. The model can be used to estimate the rating-adjusted EBR, its risk premium components, including a certainty...