Unknown model parameters, like expected returns, cannot be accurately estimated from short samples. Respective estimation error most likely leads to the portfolio, inconsistent with its target risk/return profile. We investigate the ways of reducing the impact of estimation error on portfolio...

The paper examines the problem of portfolio selection based on the forecasts of unknown quality in a mean-variance framework. Early work by Treynor and Black (1973) established a relationship between the correlation of forecasts, the number of independent securities available and the Sharpe...

We study the effect of ambiguity on timing decisions. An agent faces a stopping problem with an uncertain stopping payoff and a stochastic time limit. The agent is unsure about the correct model quantifying the uncertainty and seeks to maximize her payoff guarantee over a set of plausible...

This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investors' information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the...

Based on OECD evidence, equity/housing-price busts and credit crunches are followed by substantial increases in public consumption. These increases in unproductive public spending lead to increases in distortionary marginal taxes, a policy in sharp contrast with presumably optimal Keynesian...

We investigate how a supply chain involving a risk-neutral supplier and a downside-risk-averse retailer can be coordinated with a supply contract. We show that the standard buy-back or revenue-sharing contracts may not coordinate such a channel. Using a definition of coordination of supply...

This paper deals with the problem of the cost of uncertainty associated with the utility maximization problem in a complete market with multiple risky assets and unobservable dividends. This leads naturally to a partial information setup from which filtering techniques can be applied. Using a...

Starting from the Avellaneda–Stoikov framework, we consider a market maker who wants to optimally set bid/ask quotes over a finite time horizon, to maximize her expected utility. The intensities of the orders she receives depend not only on the spreads she quotes, but also on unobservable...

We study the experimentation dynamics of a decision maker (DM) in a two-armed bandit setup (Bolton and Harris [1999]), where the agent holds ambiguous beliefs regarding the distribution of the return process of one arm and is certain about the other one. The DM entertains Multiplier preferences...