In spite of the popularity of model calibration in finance, empirical researchers have put more emphasis on model estimation than on the equally important goodness-of-fit problem. This is due partly to the ignorance of modelers, and more to the ability of existing statistical tests to detect...

Unconventional monetary policy tools are based on the belief that there exists a zero-lower bound on interest rates. This paper argues, based on economic theory and the empirical evidence, that this belief is a myth and not a reality. It is shown that a negative default-free spot rate of...

The purpose of this paper is to test the time-invariance of the beta coefficients estimated by the Adaptive Multi-Factor (AMF) model. The AMF model is implied by the generalized arbitrage pricing theory (GAPT), which implies constant beta coefficients. The AMF model utilizes a Groupwise...

Defining a futures return as the rate of change of futures prices, as done in many empirical studies, implicitly implies that a futures contract is fully collateralized. We adjust futures' returns to explicitly account for holding the minimum margin (collateral) and the return to this...

This paper documents the fact that in options markets, the (percentage) implied volatility bid-ask spread increases at an increasing rate as the option's maturity date approaches. To explain this stylized fact, this paper provides a market microstructure model for the bid-ask spread in options...

Aggregation is an often used tool in finance and macroeconomics, whereby economic equilibrium in a heterogeneous trader economy is characterized by means of the first order optimality conditions of a representative agent. In this paper we study the conditions under which a representative agent...

Using a standard frictionless, continuous time, and continuous trading stochastic economy with heterogeneous beliefs, the purpose of this paper is to provide sufficient conditions for the existence of competitive equilibrium in an incomplete asset market. A new approach to proving existence is...

This paper derives an equilibrium capital asset pricing model (CAPM) in a market where asset prices can exhibit price jumps and price bubbles. We derive a generalized intertertemporal CAPM and consumption CAPM for these markets. The derived risk return relation differs from the classical results...

This paper studies the relation between concavity, stochastic or state dependent utility functions, and risk aversion. Using the common definition of risk aversion, but modified for state dependent preferences, we show that concavity does not imply risk aversion. Instead, it implies a weaker...

This paper revisits the “economics of insurance” using the insights from derivatives pricing and hedging. Applying this perspective, we emphasize the following insights applicable to insurance. First, we provide a valid justification for the use of arbitrage-free insurance premiums. This...