The aim of this paper is to show, within the mean-variance framework, how the market belief can be constructed as the result of the aggregation of heterogeneous beliefs and how the market equilibrium prices of risky assets can thus be determined. The heterogeneous beliefs are defined in terms of...

Some researchers and many practitioners have move from the classic mean-variance (Markowitz, 1959) portfolio theory to a new portfolio optimization framework based on downside-risk measures that are more appropriate to the investor’s preferences. Moreover, several studies (Friedman and...

We solve the optimal saving/portfolio-choice problem in an intertemporal recursive utility framework. Our solution to this problem is sufficiently general to allow (i) risk aversion to vary independently of intertemporal substitution, (ii) many risky assets, (iii) stochastic labor income that...

International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how...

We investigate return predictability and the implied intertemporal hedging demands for stocks and bonds in the U.S., Australia, Canada, France, Germany, Italy, and U.K. We first estimate predictive regression models for domestic bill, stock, and bond returns in each country, where returns depend...

This paper develops a detailed partial equilibrium model of housing wealth's role over the life-cycle to explore (1) housing's dual role as a consumption and investment good; (2) the significance of the mortgage contract being in nominal and not real terms; and (3) the tax benefits associated...

Blume and Easly [1992] show that if agents have the same savings rule, an expected discounted logarithmic utility maximizer with correct beliefs will dominate. If no agent adopts this rule, then agents with incorrect beliefs, but equally averse to risk as logarithmic utility maximizers, may...

In an American continuous-installment option the premium, instead of being paid up-front, is paid at a certain rate per unit time. At any time at or before maturity date, the holder has the right to terminate payments and either exercise the option or "walk away" from deal. Under the standard...

The paper deals with a newly discovered credit card puzzle. Many US households revolve a balance on high-interest credit cards while holding low-interest liquid or total safe assets that could be used to repay this balance. Such behavior seems to ignore obvious arbitrage opportunities and to...

A notion of forecast quality is defined that is appropriate when returns forecasts are used in a simple investment decision. The relation between the conditional distribution of returns and optimal point forecasts for a risk neutral investor is characterised and it is shown that the conditional...