This paper addresses questions regarding the dimensionality of the stochastic discount factor and the selection of the best factors that enter it. We analyze these questions theoretically and empirically with a novel methodology which performs both (i) estimation of factor loadings and (ii) best...

Can the exchange rate be stationary in levels? We answer this question in the negative by proving an impossibility theorem, built upon the absence of arbitrage in international economies. We establish the sufficient conditions for the exchange rate to not be a stationary process in levels, and...

The VIX futures curve is most often in contango but displays backwardation during unfavorable market conditions. We construct an explanation based on the notion of stochastic orders of volatility uncertainty – meaning that investors view short-dated volatility uncertainty as being less likely...

We develop a way of ranking and scoring actively managed funds and investment strategies. Our performance measure accounts for the feature that investors may exhibit caution, via the mechanism of ambiguity aversion, when evaluating investment strategies. Linking developed theory to data, we...

We consider an incomplete markets international economy in discrete-time. The first result is an impossibility theorem showing that if cross-currency no-arbitrage is to hold, the exchange rate cannot be a stationary process in levels. The second result is a system of stochastic discount factor...

The goal of Section I is to show the economic foundations for the form of the distortion function A[dt; κ] in equation (2). This is formalized through Proposition IA3 and Corollary IA4.Section II contains the proof of axiomatic consistency properties of the MAP performance measure (Section...

We present a new term-structure model for commodity futures prices based on Trolle and Schwartz (2009) which we extend by incorporating multiple jump processes. Our work explores the valuation of plain vanilla options on futures prices when the spot price follows a log-normal process, the...

This paper proposes a measure of exchange rate disconnect. Working in a two-currency international economy, our theory implies that the disconnect is the ratio of two martingales. Weanalyze empirically our measure of disconnect using 406 pairs of economies to reveal a geography of disconnect....