It is well-documented that economies experience business cycles. Economic and financial activities fall sharply during recessions and rise sharply during booms. This phenomenon also gives rise to cyclical asset pricing implications: high asset prices (low returns) during booms and low prices...

We examine several continuous-time term-structure models, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that inquiring which parameters of the short-term interest rate equation are allowed to switch is crucial, as failing to do so may result in switching...

We develop a model of regime-switching risk premia as well as regime-dependent factor risk premia to price real options. The model incorporates the observation that the underlying risky income streams of real options are subject to discrete shifts over time as well as random changes. The...

We examine several discrete-time versions of the Cox, Ingersoll and Ross (CIR) model for the term structure, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that careful consideration of which parameters of the short-term interest rate equation that are...

The inability of standard intertemporal economic models under resonable values of the key parameters to generate the observed equity premium is termed as the equity premium puzzle. In order to resolve the puzzle, we propose a new approach based on worst-case analysis where agents make decisions...

It has been recognized that (i) decision makers' concerns about robustness affect prices and quantities; and (ii) uncertainty are generated by infrequent large shocks as well as continuous small shocks. An investor observes movements in variable levels but cannot perfectly distinguish their...

We extends the aggregate risk modeling approach to include the regime switching risk triggered by a `regime shift' in economic conditions and to uncertainty aversion (robust control). We use a regime switching process rather than the popular diffusion-jump process for a number of reasons....