This paper considers the estimation of parameters in a dynamic stochastic model for securities prices, where the expected rate of return is a random variable. An empirical Bayes estimator is developed from the model structure. The estimator is an improvement on other popular estimators in terms...

This paper presents a method for solving multiperiod investment models with downside risk control characterized by the portfolio's worst outcome. The stochastic programming problem is decomposed into two subproblems: a nonlinear optimization model identifing the optimal terminal wealth and a...

Nonzero transaction costs invalidate the Black-Scholes (1973) arbitrage argument based on continuous trading. Leland (1985) developed a hedging strategy which modifies the Black-Scholes hedging strategy with a volatility adjusted by the length of the rebalance interval and the rate of the...