This paper suggests incorporating investor probability weighting and the default risk of individual firms into a consumption-based asset pricing model. The extended model provides a unified solution for several anomalous patterns observed on financial markets. The analysis addresses not only...

This study proposes a direct estimation method for recovering subjective probability distributions from option prices. We find that the subjective cumulative distribution function and subjective statistics are represented as static portfolios composed of plain vanilla options. The portfolio...

This paper considers a new problem for portfolio optimization with a choice of a probability measure, particularly, an optimal investment problem under sentiments. Firstly, we formulate the problem as a sup-sup-inf problem consisting of optimal investment and a choice of a probability measure...