Since the work by Stigler on the economics of information in the early 1960s, economists have paid closer attention to the role of search for information. However, search methods are not considered in the theory of portfolio choice. We present a model of investor search behavior in order to...

In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for hedging derivatives assuming that a hedger should not always...

In this paper, we explain main concepts of Prospect Theory and Cumulative Prospect Theory within the rational dynamic asset pricing framework. We derive option pricing formulas when asset returns are altered by a generalized Prospect Theory value function or a modified Prelec's weighting...

In this paper we address three main objections of behavioral finance to the theory of rational finance, considered as “anomalies” the theory of rational finance cannot explain: (i) Predictability of asset returns; (ii) The Equity Premium; (iii) The Volatility Puzzle. We offer resolutions of...

This chapter summarizes the current state of research on how taxation affects household decisions with respect to portfolio structure and asset trading. It discusses long-standing issues, such as the impact of differential taxation of income flows from stocks and bonds on the incentives for...