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Given a deterministically time-changed Brownian motion Z starting from 1, whose time-change V(t) satisfies V(t) t for all t 0, we perform an explicit construction of a process X which is Brownian motion in its own filtration and that hits zero for the first time at V(τ), where τ:= inf {t 0:...
Persistent link: https://www.econbiz.de/10011071374
Given a Markovian Brownian martingale Z, we build a process X which is a martingale in its own filtration and satisfies X1=Z1. We call X a dynamic bridge, because its terminal value Z1 is not known in advance. We compute its semimartingale decomposition explicitly under both its own filtration...
Persistent link: https://www.econbiz.de/10010746293
Probably not. First, allowing the probabilities attached to the states of the economy to differ from their sample frequencies, the Consumption-CAPM is still rejected by the data and requires a very high level of Relative Risk Aversion(RRA) in order to rationalize the stock market risk premium....
Persistent link: https://www.econbiz.de/10011071098
A reduction in inflation can fuel run-ups in housing prices if people suffer from money illusion. For example, investors who decide whether to rent or buy a house by simply comparing monthly rent and mortgage payments do not take into account that inflation lowers future real mortgage costs. We...
Persistent link: https://www.econbiz.de/10011071404
This paper shows, from the consumer’s budget constraint, that expected future labor income growth rates and the residuals of the cointegration relation among log consumption, log asset wealth and log current labor income (summarized by the variable cay of Lettau and Ludvigson (2001a)), should...
Persistent link: https://www.econbiz.de/10011071442
This paper shows that in a non-representative agent model in which households face short selling constraints and labor income risk, in the form of both uninsurable shocks and a common aggregate component, small differences in the correlation between aggregate labor income shocks and domestic and...
Persistent link: https://www.econbiz.de/10010928808
This paper offers two main contributions. First, it shows how the Baxter and Jermann (1997) claim that, once we consider human capital risk, the international diversification puzzle is worse than we think, is based on an econometric misspecification rejected by the data. Second, it outlines how,...
Persistent link: https://www.econbiz.de/10010746135
We show the existence of a continuous-time Nash equilibrium in a financial market with risk averse market makers and an informed trader with a private information. The unwillingness of market makers to bear risk causes the informed trader to absorb large shocks in their inventories. The informed...
Persistent link: https://www.econbiz.de/10011141285
We consider an equilibrium model á la Kyle-Back for a defaultable claim issued by a given firm. In such a market the insider observes \emph{continuously in time} the value of firm, which is unobservable by the market maker. Using the construction of a dynamic Bessel bridge of dimension $3$ in...
Persistent link: https://www.econbiz.de/10011073367
Given a Markovian Brownian martingale Z, we build a process X which is a martingale in its own filtration and satisfies X1=Z1. We call X a dynamic bridge, because its terminal value Z1 is not known in advance. We compute its semimartingale decomposition explicitly under both its own filtration...
Persistent link: https://www.econbiz.de/10008875125