We analyse a portfolio optimization problem for a long-term investor in the presence of stock market crises. A crisis includes a crash of the stock market price, a sharp increase of its volatility and dramatic deterioration of liquidity. We model the stock market illiquidity by means of convex...

It is a well-known anomaly that prices of put options are too high when options are out-of-the-money. This paper presents a simple general equilibrium model of the market where European put options become substantially overpriced when they are out-of-the-money. Overpricing is due to the presence...

It is a well-known anomaly that prices of put options are too high when options are out-of-the-money. This paper presents a simple general equilibrium model of the market where European put options become substantially overpriced when they are out-of-the-money. Overpricing is due to the presence...

We consider a portfolio optimization problem for an investor who can trade liquid and illiquid stocks. The illiquidity of a stock is defined by the presence of a transitory price impact. We analyze the effects from the presence of illiquid stocks on allocations to liquid ones and vise versa. We...

We consider an equilibrium in illiquid stock market in which liquidity suppliers trade with investors and face significant trading costs. A similar situation was observed during the recent financial crisis. We find that the expected risk premium on the stock and its Sharpe ratio are positive and...

We extend the theory of super-replicating a European option by relaxing its two main assumptions: We take into account the constraints on trading the option and allow it to be traded inter-temporally. The first extension has a dramatic effect on the price of a portfolio hedging the option, while...

This paper presents an equilibrium model of the term structure of interest rates when investors have heterogeneous recursive preferences. We consider a pure exchange economy with two classes of investors who have different relative risk aversions and different elasticities of intertemporal...

We consider a portfolio optimization problem for a short--term investor who faces an illiquid stock market. The illiquidity of this market results from a transitory price impact that is captured by the transaction costs that are convex in the number of shares traded by an investor. The linear...

Value at Risk (VaR) has emerged in recent years as a standard tool to measure and control the risk of trading portfolios. Yet, existing theoretical analyses of the optimal behavior of a trader subject to VaR limits have produced a negative view of VaR as a risk-control tool. In particular, VaR...