The classic Lucas asset pricing model with complete markets stresses aggregate risk and, hence, fails to investigate the impact of agents heterogeneity on the dynamics of the equilibrium quantities and measures of trading volume. In this paper, we investigate under what conditions...

We develop a q-theoretic model of investment under incomplete information that explains the link between idiosyncratic volatility and stock returns. When calibrated to match properties of the US business cycles as well as various firms and industry characteristics, the model generates a negative...

When investors have incomplete information, expected returns, as measured by an econometrician, deviate from those predicted by standard asset pricing models by including a term that is the product of the stock’s idiosyncratic volatility and the investors’ aggregated forecast errors. If...

We consider a pure exchange economy with incomplete information. Some agents in the economy display learning bias and over- or underreact to the arrival of new information. We study, by simulation, the distribution of irrational agents’ consumption shares. We find that over a reasonable...

We consider a pure exchange economy with incomplete information. Some agents display learning bias and over- or under-react to the arrival of new information. We show under which conditions biased agents survive over a finite horizon. We also study the distribution of irrational agents...

We consider a pure exchange economy where the drift of aggregate consumption is unobservable. Agents with heterogeneous beliefs and preferences act competitively on financial and goods markets. We discuss how equilibrium market prices of risk differ across agents, and in particular we discuss...

A dynamic asset allocation problem in the presence of liabilities is considered. The fund manager has von Neumann-Morgenstern preferences with terminal utility function defined over the excess of liquid wealth over a minimum liability coverage tolerated and intermediate utility function defined...

This paper provides (i) new results on the structure of optimal portfolios, (ii) economic insights on the behavior of the hedging components and (iii) an analysis of simulation-based numerical methods. The core of our approach relies on closed form solutions for Melliavin derivatives of...

This paper studies the limit distributions of Monte Carlo estimators of diffusion processes. Two types of estimators are examined. The first one is based on the Euler scheme applied to the original processes; the second applies the Euler scheme to a variance-stabilizing transformation of the...