We analyze the problem of real optimal asset allo cation for a p ensionfund maximising the exp ected CRRA utility of its real disp osable wealth.The financial horizon of the analysis coincides with the random deathtime of a representative subscriber. We consider a very general settingwhere...

This paper shows optimal asset allocation during these two phases must be different.

Previous research has shown that frictions might have a significant impact on the value of a contingent claim, as discussed, for example, in Karatzas & Kou (1996)and Collin-Dufresne & Hugonnier (2002). We consider two types of frictions particularly important: frictions related to trading, such...

In June 2003 Swiss banks held over CHF 500 billion in mortgages. This important segment accounts for about 63% of all loan portfolios of Swiss banks. Since default insurance is not common in Switzerland, the corresponding risks are a severe threat for the health of the financial system. We...

We study the strategic asset allocation for an international investor. The recent empirical evidence on the partial predictability of asset returns has renewed theacademic and practical interest in strategic asset allocation. To model time varying returns on stocks, we use a Gaussian...

We prove that under very weak conditions optimal financial products have to be co-monotone with the inverted state price density. Optimality is meant in the sense of the maximization of an arbitrary preference model, e.g. Expected Utility Theory or Prospect Theory. The proof is based on methods...

According to the traditional view held in finance returns of assets are determined by complete rationality of decision makers. Rational decisions are defined by a set of axioms that are universal and do not leave room for cultural differences. In this article we show that cultural differences do...

Modern portfolio theory regards the return of an asset as its upside, while volatilityis seen as its downside. This view is shared by the majority of investors who dislikevolatile markets. Recent results in financial mathematics, however, show thatvolatility is actually good, rather than bad,...

In this paper we present a modelling framework for portfolio credit risk which incorporates the dependence between risk-free interest-rates and the default loss process. The contribution in this approach is that - besides the traditional diffusion based covariation between loss intensities and...

We use portfolio theory to quantify the efficiency of state-level sectoral patterns of production in the United States. On the basis of observed growth in sectoral value-added output, we calculate for each state the efficient frontier for investments in the real economy. We study how rapidly...