Contemporary financial stochastic programs typically involve a trade-off between return and (downside)-risk. Using stochastic programming we characterize analytically (rather than numerically) the optimal decisions that follow from characteristic single-stage and multi-stage versions of such...

Recent research reveals that hedge fund returns exhibit a range of different, possibly non-linear pay-off patterns. It is difficult to qualify all these patterns simultaneously as being rational in a traditional framework for optimal financial decision making. In this paper we present a simple...

Most empirical studies assume only monotonic preferences for households. Behavioral research however provides substantial evidence that preferences for wealth are measured relative to a reference point. In this paper we introduce and solve a two-period consumption and savings model for a...

This paper estimates the impact of the murder of film maker Theo van

We show that if an agent is uncertain about the precise form of his utility function, his actual relative risk aversion may depend on wealth even if he knows his utility function lies in the class of constant relative risk aversion (CRRA) utility functions. We illustrate the consequences of this...

This paper tests the policitcal dimensions of the presidential cycle effect in U.S. financial markets. The presidential cycle effect states that average stock market returns are significantly higher in the last two years compared to the first two years of a presidential term. We confirm the...

According to disposition effect theory, people hold losing investments too long. However, many investors eventually sell at a loss, and little is known about which psychological factors contribute to these capitulation decisions. This study integrates prospect theory, utility maximization...

We model 1927-1997 U.S. business failure rates using a time series approach based on unobserved components. Clear evidence is found of cyclical behavior in default rates. The cycle has a period of around 10 years. We also detect longer term movements in default probabilities and default...

Dynamic models for credit rating transitions are important ingredients for dynamic credit risk analyses. We compare the properties of two such models that have recently been put forward. The models mainly differ in their treatment of systematic risk, which can be modeled either using discrete...

We extend the Hidden Markov Model for defaults of Crowder, Davis, and Giampieri (2005) to include covariates. The covariates enhance the prediction of transition probabilities from high to low default regimes. To estimate the model, we extend the EM estimating equations to account for the time...