The treatment of this article renders closed-form density approximation feasible for univariate continuous-time models. Implementation methodology depends directly on the parametric-form of the drift and the diffusion of the primitive process and not on its transformation to a unit-variance...

This paper develops a model of trading in stocks and options based on differences of opinion of public information among risk-averse investors. It shows that both additional trading sessions and the introduction of options enhance investors' perceived welfare and that in the presence of options,...

This paper develops an integrated model of asset pricing and moral hazard. In particular, we combine a version of the Capital Asset Pricing Model (CAPM) with a multi-agent moral hazard model. The excess returns for risky assets, optimal contracts for managers (agents) that involve relative...

The treatment of this article renders closed-form density approximation feasible for univariate continuous-time models. Implementation methodology depends directly on the parametric-form of the drift and the diffusion of the primitive process and not on its transformation to a unit-variance...

This article develops an integrated model of asset pricing and moral hazard. It is demonstrated that the expected dollar return of a stock is independent of managerial incentives and idiosyncratic risk, but the equilibrium price of the stock depends on them. Thus, the expected rate of return is...

We analyze the effects of differences of opinion on the dynamics of trading volume in stocks and options. We find that disagreements about the mean of the current- and next-period public information lead to trading in stocks in the current period but have no effect on options trading. Without...

We solve a liquidation problem for an agent with preferences consistent with the prospect theory of Kahneman and Tversky (1978). We find that the agent is willing to hold a risky project with a relatively inferior Sharpe ratio if the project is currently making losses, and intends to liquidate...

In a dynamic trading model, investors with heterogeneous beliefs have an option to sell the stock now and buy it back later. Due to this repurchase option and the risk aversion of investors, it is possible for the stock price to be lower than the lowest valuation among investors even when the...

We derive an equilibrium price that converges to be strong-form informationally efficient in the original Grossman-Stiglitz model (1980). Specifically, we show that when the private signal converges to be perfect or traders converge to be risk neutral, there exists a unique overall equilibrium...

We analyze how speculative financial innovation affects stock prices, option prices, risk premium, market liquidity, and investor welfare in an economy with heterogeneous beliefs. When investors disagree about the covariance of the newly introduced stocks with the original stocks, we show that...