Maximum likelihood estimation of discretely observed diffusion processes is mostly hampered by the lack of a closed form solution of the transient density. It has recently been argued that a most generic remedy to this problem is the numerical solution of the pertinent Fokker-Planck (FP) or...

We develop a penalized two-pass regression with time-varying factor loadings. The penalization in the first pass enforces sparsity for the time-variation drivers while also maintaining compatibility with the no arbitrage restrictions by regularizing appropriate groups of coefficients. The second...

The Efficiency Market Hypotheses (EMH) imply rational investors and no asset mispricing in the medium run. This paper critically evaluates on the point of whether an asset price bubble is an irrational phenomenon that cannot be detected. Thereby, I review the existing literature and reflect on...

The influence of past stock price movements on volatilities and correlations is essential for understanding diversification and contagion in financial markets. We develop a model that makes the influence of past returns on volatilities and correlations explicit. Employing information about...

This study presents and empirically tests a simple framework that examines the effects of market liquidity (the ease with which stocks are traded) and funding liquidity (the ease with which market participants can obtain funding) on stock market bubbles. Three key findings emerge from this...

Models based on factors such as size, value, or momentum are ubiquitous in asset pricing. Therefore, portfolio allocation and risk management require estimates of the volatility of these factors. While realized volatility has become a standard tool for liquid individual assets, this measure is...

Traditional finance is built on the rationality paradigm. This chapter discusses simple models from an alternative approach in which financial markets are viewed as complex evolutionary systems. Agents are boundedly rational and base their investment decisions upon market forecasting heuristics....