With transactions costs for trading goods, the nominal exchange rate moves within a band around the nominal PPP value. We model the behavior of the band and of the exchange rate within the band. The model explains why there are below-unity slope coefficients in regression tests of PPP, and why...

In this paper, we examine the effect of segmented commodity markets on the relationship between the forward exchange rates premium and changes in the future spot rates in a general equilibrium model. Market segmentation is modeled by introducing a proportional cost for transferring physical...

This paper considers the problem of a financial institution that needs to hedge a stream of state-contingent cash flows while facing borrowing and short-sales restrictions. The study determines analytically the strategy that minimizes the initial cost of hedging the desired cash flow, which is...

Does the choice of weighting scheme used to form test portfolios influence inferences drawn from empirical tests of asset pricing? To answer this question we first show that, with monthly rebalancing, an equal-weighted portfolio outperforms a value-weighted portfolio in terms of total mean...

Our objective is to investigate the effect of model misspecification on mean-variance portfolios and to show how asset-pricing theory and asymptotic analysis (for large number of assets) can be used to provide powerful solutions to mitigate misspecification. The starting point of our analysis is...

We develop a normative theory for constructing mean-variance portfolios robust to model misspecification. We identify two inefficient portfolios---an "alpha'' portfolio, representing latent asset demand, that depends only on pricing errors and a "beta'' portfolio that depends on factor risk...

Empirical evidence shows that households' subjective beliefs deviate from rational beliefs. Combining concepts from psychology and robust control, we develop a model where the endogenous deviations of subjective beliefs from rational beliefs about firm-level expected risk premia are an...

We study the effect of introducing a nonredundant derivative on the volatilities of the stock market return and the locally risk-free interest rate. Our analysis uses a standard, frictionless, full-information, dynamic, continuous-time, general-equilibrium, Lucas endowment economy in which there...

A fundamental insight in finance is that there is a strong risk-return tradeoff. Moreira and Muir (2017) challenge this by showing that investors can increase Sharpe ratios by reducing exposure to risk factors when their volatility is high. However, Cederburg, O'Doherty, Wang, and Yan (2020)...