In this paper, we introduce a new pseudo-Bayesian model to incorporate the impact of a financial crisis and establish some properties of stock returns and investors' behavior during a financial crisis and subsequent recovery. Our approach provides a quantitative description for investors'...

In this paper, we introduce a new Bayesian approach to explain some market anomalies during financial crises and subsequent recovery. We assume that the earnings shock of an asset follows a random walk model with and without drift to incorporate the impact of financial crises. We further assume...

In this paper we present two dynamic models of background risk. We first present a stochastic factor model with an additive background risk. Thereafter, we present a dynamic model of simultaneous (correlated) multiplicative background risk and additive background risk. In so doing, we use a...