Using the Hamilton-Jacobi-Bellman equation, we derive both a Keynes-Ramsey rule and a closed form solution for an optimal consumption-investment problem with labor income. The utility function is unbounded and uncertainty stems from a Poisson process. Our results can be derived because of the...

In accordance with Basel Capital Accords, the Capital Requirements (CR) for market risk exposure of banks is a nonlinear function of Value-at-Risk (VaR). Importantly, the CR is calculated based on a bank's actual portfolio, i.e. the portfolio represented by its current holdings. To tackle...

This paper proposes a novel test of zero pricing errors for the linear factor pricing model when the number of securities, N, can be large relative to the time dimension, T, of the return series. The test is based on Student t tests of individual securities and has a number of advantages over...

We develop a macroeconomic framework in which firms are large and have market power with respect to both products and labor. Each firm maximizes a share-weighted average of shareholder utilities, which makes the equilibrium independent of price normalization. In a one-sector economy, if returns...

This paper investigates the limit properties of mean-variance (mv) and arbitrage pricing (ap) trading strategies using a general dynamic factor model, as the number of assets diverge to infinity. It extends the results obtained in the literature for the exact pricing case to two other cases of...

We define a class of risk-taking-neutral (RTN) background risks. These background risks have the property that they will not alter decisions made with respect to another risk, for individuals with HARA utility. If we wish to compare a decision made with and without some exogenous background...

To understand why investors hold socially responsible mutual funds, we link administrative data to survey responses and behavior in incentivized experiments. We find that both social preferences and social signaling explain socially responsible investment (SRI) decisions. Financial motives play...

In this paper we model how the existence of different beliefs about the underlying fundamental value of a currency affects the dynamics of the exchange rate. We find that a divergence of beliefs creates the potential for waves of optimism and pessimism that alternate in an unpredictable way....

We study the effect of analyst coverage on firms' innovation strategy and outcome. By considering three different channels that allow firms to innovate: internal R&D, acquisitions of other innovative firms, and investments in corporate venture capital (CVC), we are able to distinguish between...

In this paper we build a formal model to study market environments where information is costly to acquire and is of use also to potential competitors. In such situations a market for information may form, where reports - of unverifiable quality - over the information acquired are sold. A...