It is widely accepted that, when return distributions are non-normal, the use of the Sharpe ratio can lead to misleading conclusions. It is well documented that deviations of hedge fund return distributions from normality are statistically significant. The literature on performance evaluation...

Considerable theoretical work has been devoted to the problem of option pricing and hedging with transaction costs. A variety of methods have been suggested and are currently being used for dynamic hedging of options in the presence of transaction costs. However, very little was done on the...

There is a big controversy among both investment professionals and academics regarding the question of how the probability that a bull or bear market terminates depends on its age. Using more than two centuries of data on the broad US stock market index, in this paper we revisit the duration...

We start this paper by presenting compelling evidence of short-term momentum in the excess returns on the S&P Composite stock price index. For the first time ever, we assume that the excess returns follow an autoregressive process of order p, AR(p), and evaluate the parameters of this process....

In this paper we consider a decision maker whose utility function has a kink at the reference point with different functions below and above this reference point. We also suppose that the decision maker generally distorts the objective probabilities. First we show that the expected utility...

The main purpose of this paper is to present a theoretically sound portfolio performance measure that takes into account higher moments of the distribution of returns. First, we perform a study of the investor's preferences to higher moments of distribution within expected utility theory and...

In the presence of transaction costs the perfect option replication is impossible which invalidates the celebrated Black and Scholes (1973) model. In this chapter we consider some approaches to option pricing and hedging in the presence of transaction costs. The distinguishing feature of all...

Considerable theoretical work has been devoted to the problem of option pricing and hedging with transaction costs. A variety of methods have been suggested and are currently being used for dynamic hedging of options in the presence of transaction costs. However, very little was done on the...

The option pricing theory is now either a standard or a main part of many financial courses on both intermediate and advanced levels. All the textbooks that include the option pricing theory present a detailed treatment of the binomial model. However, the binomial model, although quite simple...

In recent years there appeared some organized markets for forward contracts and options on these contracts. In this paper we review shortly the organization of trade on a centralized forward market. Assuming a friction-free market with constant interest rate we build a consistent continuous time...