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We present a nonparametric method to recover a bound on ex ante dispersion of beliefs (DBB) from asset prices with minimal assumptions. DBB constrains the dispersion among all possible distributions in an economy, consistent with observed prices and subject to a good-deal bound. In model-based economies, DBB effectively tracks belief heterogeneity and serves as a diagnostic tool for evaluating model calibrations. Empirically, DBB relates to common proxies of belief dispersion, offering a real-time, market-implied disagreement measure. Our versatile approach applies to both complete and incomplete markets represented by any asset class. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.01587. [ABSTRACT FROM AUTHOR]

Severance savings accounts (SSA) is an important government program aimed at protecting laid-off workers and stimulating savings. We analyze the distributive and aggregate effects of SSA in a rich life-cycle model with heterogeneous agents and incomplete markets. The model is estimated to be consistent with micro and macro data from Brazil. Our analysis reveals that, despite a decrease in voluntary savings, the policy expands aggregate savings, output, and wages, leading to long-run welfare gains. We show that although better risk sharing is important for our findings, the bulk of the gains come from improved efficiency as labor productivity increases and labor supply is reallocated towards highly educated workers and the early stages of the life cycle where agents are generally poorer and leisure is less valued. Interestingly, most of the gains we find accrue to less educated agents as the distribution of this group is skewed towards the informal sector, and they do not directly incur the additional burden from the increase in contributions. We also explore an alternative policy design in which households are allowed to access their severance savings accounts only after retirement, as in a defined contribution pension system. We find that despite greater uncertainty in medical costs later in life, households prefer a more flexible system that provides access to the SSA fund during working-age and after retirement. [ABSTRACT FROM AUTHOR]

We provide conditions for the feasibility of robust Pareto-improving (RPI) policies when markets are incomplete and the interest rate is below the growth rate. We allow for arbitrary heterogeneity in preferences and income risk and a wedge between the return to capital and bonds. An RPI improves risk sharing and can induce a more efficient level of capital. Elasticities of aggregate savings to changes in interest rates are the crucial ingredients to the feasibility of RPIs. Government debt may complement rather than substitute for capital in an RPI. Our analysis emphasizes the welfare-improving qualities of government bonds versus explicit redistribution. (JEL D52, E43, E62, H20, H63) [ABSTRACT FROM AUTHOR]

Compared to the distributions of earnings, the distributions of wealth in the US and many other countries are strikingly concentrated on the top and skewed to the right. To explain the income and wealth inequality, we provide a tractable heterogeneous‐agent model with incomplete markets in continuous time. We separate illiquid capital assets from liquid bond assets and introduce jump risks to capital income, which are crucial for generating a thicker tail of the wealth distribution than that of the labor income distribution. Under recursive utility, we derive optimal consumption and wealth in closed form and show that the stationary wealth distribution has an exponential right tail that closely approximates a power‐law distribution. Our calibrated model can match the income and wealth distributions in the US data including the extreme right tail of the wealth distribution. [ABSTRACT FROM AUTHOR]

In this paper, we explore the connection between a single index model under the real-world probability measure and martingale pricing via minimal relative entropy or Esscher transform, within the context of a one-period market model, possibly incomplete, with multiple risky assets and a single risk-free asset. The minimal relative entropy martingale measure and the Esscher martingale measure coincide in such a market, provided they both exist. From their Radon–Nikodym derivative, we derive a portfolio of risky assets in a natural way, termed portfolio G. Our analysis shows that pricing using the Esscher or minimal relative entropy martingale measure is equivalent to a single index model (SIM) incorporating portfolio G. In the special case of elliptical returns, portfolio G coincides with the classical tangency portfolio. Furthermore, in the case of jointly normal returns, Esscher or minimal relative entropy martingale measure pricing is equivalent to CAPM pricing. [ABSTRACT FROM AUTHOR]

We derive a Clark-Ocone-Haussmann (COH) type formula under a change of measure for L 1 -canonical additive processes, providing a tool for representing financial derivatives under a risk-neutral probability measure. COH formulas are fundamental in stochastic analysis, providing explicit martingale representations of random variables in terms of their Malliavin derivatives. In mathematical finance, the COH formula under a change of measure is crucial for representing financial derivatives under a risk-neutral probability measure. To prove our main results, we use the Malliavin-Skorohod calculus in L 0 and L 1 for additive processes, as developed by Di Nunno and Vives (2017). An application of our results is solving the local risk minimization (LRM) problem in financial markets driven by pure jump additive processes. LRM, a prominent hedging approach in incomplete markets, seeks strategies that minimize the conditional variance of the hedging error. By applying our COH formula, we obtain explicit expressions for locally risk-minimizing hedging strategies in terms of Malliavin derivatives under the market model underlying the additive process. These formulas provide practical tools for managing risks in financial market price fluctuations with L 1 -additive processes. [ABSTRACT FROM AUTHOR]

In the allocation of resources toward public infrastructure, spending on maintenance is typically neglected. Using a heterogeneous agent model, we find that reallocating funding away from new infrastructure investment and toward maintenance raises the effectiveness of existing public infrastructure and thus yields gains in GDP and in aggregate welfare. Richer households experience larger welfare gains than poorer households. A reallocation that takes funding away from maintenance is found to have adverse effects on GDP and aggregate welfare. Raising new funding with taxation yields larger positive benefits if this additional spending is divided between maintenance expenditures and investment in new infrastructure. Giving in to the "Tyranny of the Ribbon" by policymakers, that is, raising new funding to be spent only on new infrastructure, is shown to be the worse option. [ABSTRACT FROM AUTHOR]

We consider the operation of a non-financial corporation and present a novel risk-management framework that supports the joint optimization of the firm's operational and financial decisions. Specifically, we study the problem of maximizing the firm's operating profits when these profits depend on movements in the financial markets, and where the decision maker—the firm's manager—is risk averse. Critically, our framework (i) imposes risk aversion through a generic class of risk constraints, and (ii) considers explicitly the differences that can exist between the shareholders' and manager's beliefs about future market risks. Together, these aspects allow us to remove speculation so that financial instruments can only be used for hedging purposes. We analyze our problem in an incomplete financial market setting and consider different informational assumptions. Within this framework, we characterize the optimal financial hedging strategy so that the problem reduces to a constrained maximization over operational policies. Our results show how financial hedging can be effectively used to expand the set of admissible operating policies, and identify conditions under which the risk constraint can be completely ignored when solving for an optimal operating policy. We illustrate our methodology in the context of an exporter firm which faces exchange rate risk in trading. [ABSTRACT FROM AUTHOR]

Income interventions with pro-poor targeting is a common fiscal policy around the world. However their distributional effects on consumption and savings are not well understood. Motivated by the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), we use longitudinal data on income and consumption of Indian households to estimate distributional effects of such interventions in a model with endogenous consumption and savings distribution, where households face uninsured income risks. In the model, a standard scheme of interventions that consistently targets low-income cohorts, has small distributional impacts on targeted and non-targeted cohorts alike. In contrast, a fiscally-equivalent scheme that changes the expected income profile of the targeted households in the same initial cohort irrespective of their future incomes, generates larger effects by changing income mobility for both the targeted and non-targeted cohorts. This mobility-based channel generates consumption responses even though the magnitude of the shock is lesser for the initially targeted cohort, as it more than offsets the effect from permanent income shock. Quantitatively, such an intervention in the order of 0.6 percent of output, approximating the Indian scenario, increases consumption share of the targeted cohort by nearly 2.5 percent, five times as large as the effect of standard interventions. The distributional effects are similar to those arising from a counterfactual policy of universal basic income. [ABSTRACT FROM AUTHOR]

A derivative is a financial asset whose future payoff is a function of underlying assets. Pricing a financial derivative involves setting up a market model, finding a martingale ("fair game") probability measure for the model from the existing asset prices, and using that probability measure to price the derivative. When the number of underlying assets and/or the number of market outcomes in the model is large, pricing can be computationally demanding. In this work, we first formulate the pricing problem in a linear algebra setting, including the realistic setting of incomplete markets where derivatives do not have a unique price. We show that the problem can be solved with a variety of quantum techniques such as quantum linear programming and the quantum linear systems algorithm. While in previous works the martingale measure is assumed to be given, here it is extracted from market variables akin to bootstrapping, a common practice among financial institutions. We discuss the quantum zero-sum game algorithm and the quantum simplex algorithm as viable subroutines. For quantum linear systems solvers, we formalize a new market assumption milder than market completeness, which allows the potential for large speedups. Towards prototype use cases, we conduct numerical experiments motivated by the Black–Scholes–Merton model. [ABSTRACT FROM AUTHOR]

This research is devoted to studying a geometric Brownian motion with drift switching driven by a 2 χ 2 Markov chain. A discrete-time multiplicative approximation scheme was developed, and its convergence in Skorokhod topology to the continuous-time geometric Brownian motion with switching has been proved. Furthermore, in a financial market where the discounted asset price follows a geometric Brownian motion with drift switching, market incompleteness was established, and multiple equivalent martingale measures were constructed. [ABSTRACT FROM AUTHOR]

Concepts are introduced and applied for analyzing and selecting arbitrage portfolios in the face of uncertainty about initial positions and risk preferences. A stochastic arbitrage opportunity is defined as a zero-cost investment portfolio that enhances every feasible host portfolio for all admissible utility functions. The alternative to the existence of such investment opportunities is the existence of a solution to a dual system of asset pricing restrictions based on a class of stochastic discount factors. Feasible approaches to numerical optimization and statistical inference are discussed. Empirical results suggest that equity factor investing is appealing for all risk-averse stock investors with a wide range of initial position and sufficiently low transactions costs by mixing multiple factor portfolios with high after-cost appraisal ratios, low mutual correlation, and negative exposures to the relevant host portfolios. These findings weaken the case for risk-based explanations for the profitability of factor investing. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4892. [ABSTRACT FROM AUTHOR]

Merchants need not fear platform entry because that can raise merchants' profits by resolving quality uncertainty for consumers. Merchants are wary of a platform's competitive entry reducing sales and margins. Profit-maximizing platforms seek to provide credible quality information to gain consumer trust and confidence. Can a platform enter so that resulting multisender prices alleviate consumers' uncertainty by signaling quality? Can merchants also benefit from platform entry? We provide answers by analyzing strategic platform and merchant pricing under quality uncertainty. A modeling innovation is a leader-follower framework for platform-merchant competition. Consumers resolve uncertainty using both platform and merchant prices. Using what we label perfect Bayes-consistent beliefs, we identify perfect Bayesian equilibrium that satisfies the intuitive criterion, and also out-of-equilibrium beliefs that are unprejudiced. A substantive finding is that platform entry can raise merchant profits when the quality is high by moving the equilibrium from pooling to separating, and supporting higher prices. Another strategic consequence of platform entry could be a separating equilibrium with incomplete market coverage due to price distortion moving to one of complete market coverage due to seller competition. Indeed, conditions exist in our model for an equilibrium outcome identical to complete information. Finally, facing entry cost, a platform may choose to enter only with high quality but quality revelation remains price dependent and not based on mere entry. History: Yuxin Chen served as the senior editor for this article. Funding: Y. Qiu was supported by the Natural Science Foundation of China [Grant 71902142] toward completion of this paper. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mksc.2021.0227. [ABSTRACT FROM AUTHOR]

This paper sets up a small open new Keynesian economy model with constrained households and incomplete markets to address the driving forces of business cycles in Korea. It shows that there exists a substantial fraction of constrained households who cannot have access to financial market. Furthermore, the estimated model reveals that a TANK model is better than a RANK model in explaining business cycles in Korea. The effect of domestic productivity shock on Korean economy has dominated in the variations of output, while the contribution of the foreign productivity shock to the variations of output and inflation has increased after the Asian financial crisis. The monetary policy shock has dominated the variation of inflation at short and medium horizons. [ABSTRACT FROM AUTHOR]

This paper demonstrates the benefits, from an expected utility perspective, of including a derivative into the universe of tradeable assets under the affine GARCH model proposed by Heston and Nandi (Rev Financ Stud 13(3):585–625, 2000. https://doi.org/10.1093/rfs/13.3.585). For this purpose, we first introduce a Power Option into the market, derive its value and moment generating function thanks to the affine GARCH structure. We then expand on the results presented by Escobar-Anel et al. (Oper Res Perspect 9:100216, 2022) by solving for the optimal investment allocations into the stock, a cash account and the option. We show that investors who are able to include a derivative indeed outperform those who only invest into the stock and the bank account. In this spirit, investors who fail to include, even a low level of exposure to the derivative, could see up to 7% annual wealth-equivalent losses. This confirms findings in continuous-time models dating to Liu and Pan (J Financ Econ 69(3):401–430, 2003). An empirical analysis on the S &P500 confirms the superiority in terms of Sharpe ratio, and maximum drawdown of portfolios with options, in-sample and out-of-sample. [ABSTRACT FROM AUTHOR]

Implementing reverse logistics in the construction industry is considered a crucial method to achieve a circular economy. Despite a wealth of research focusing on improving reverse logistics systems, businesses still encounter challenges during the implementation process. Therefore, this study conducted a systematic literature review utilizing bibliometric methods to analyze 623 articles on reverse logistics in the construction industry published on Web of Science from 1995 to 2023. Additionally, a comprehensive review of 56 high-quality literature on obstacles to implementing reverse logistics in the construction industry and optimizing reverse supply chains was conducted. This review uncovered the current status and challenges of implementing reverse logistics in the construction industry and proposed potential solutions to address these issues. The main findings of this study include: (1) increasing academic interest in construction waste reverse logistics, with Chinese scholars leading the way and publications predominantly in environmental and construction journals, with limited coverage in logistics journals; (2) the primary obstacles to implementing reverse logistics in the construction industry lie in supply chain management, such as lacking deconstruction designs, incomplete recycling markets, difficulties in evaluating the quality of secondary materials, and insufficient supply chain integration; (3) proposing a framework for a construction industry reverse logistics supply chain ecosystem, aiming to establish a platform to facilitate online collection of construction waste, online transactions of secondary materials, end-to-end monitoring, and data analytics for consultation. [ABSTRACT FROM AUTHOR]

We show how a heterogeneous agent New Keynesian (HANK) model with incomplete markets and portfolio choice can be estimated in state space using a Bayesian approach. To render estimation feasible, the structure of the economy can be exploited and the dimensionality of the model automatically reduced based on the Bayesian priors. We apply this approach to analyze how much inequality matters for the business cycle and vice versa. Even when the model is estimated on aggregate data alone and with a set of shocks and frictions designed to match aggregate data, it broadly reproduces observed US inequality dynamics. (JEL D31, D52, E12, E32, E52, E62) [ABSTRACT FROM AUTHOR]

We construct a model where, at each time instance, risky securities can only take a limited number of values and the equity-linked policy sold by the insurer to policyholders pays benefits linked to these securities. Since the number of states in the model exceeds the number of securities in the (incomplete) market, the martingale measure is not unique, posing a problem in pricing insurance instruments. In this framework, we consider how a super-replicating strategy violates the assumption of absence of arbitrage, yet simultaneously allows the insurance company to fully hedge against financial risk. Since the super-replicating strategy, when considered alone, would be too costly for any rational insured person, through the definition of the safety loading, we demonstrate how the insurer can still hedge against financial risk, albeit at the expense of increasing its exposure to demographic risk. This approach does not aim to show how the pricing of the index-linked policy can actually be performed but rather highlights how risk theory-based approaches (via the definition of the profit and loss random variable) enable the management of the trade-off between financial risk and demographic risk. [ABSTRACT FROM AUTHOR]

The effect of demand uncertainty reduction (DUR) on supply chain management has received tremendous attention. From a financial perspective, studying the impact of DUR is equally significant. This study explores the relationship between DUR and private equity (PE) financing in retail enterprises within a supply chain, which comprises a dominant supplier and a subordinate retailer. This article establishes decision models for a retailer backed by PE under three market demand conditions: range, mean, and range with mean. The study further investigates the impact of partial demand uncertainty reduction (PDUR) on the retailer and PE through comparative analysis of these scenarios. To address incomplete market demand information during the decision-making process, the study employs the minimax regret criterion to construct and solve the model. An intriguing finding of this study is that contrary to intuition, PDUR not only fails to promote PE but also reduces the retailer's willingness to finance and decreases the asset size for both the retailer and PE. In addition, the better the growth potential for the retail enterprise, the more severe the negative impact brought about by PDUR. Moreover, the impact of PDUR on supplier and supply chain performance is two-fold. PDUR based on range information has a negative impact on the expected profit of the supplier and the supply chain, while PDUR based on mean information has a positive impact on their expected profit. [ABSTRACT FROM AUTHOR]

The paper considers the statistical concept of causality in continuous time, which is based on Granger's definition of causality. We give necessary and sufficient conditions, in terms of statistical causality, for the preservation of the strong property of predictable representation for stopped martingales when filtration is decreased. This concept of causality is also connected to the preservation of the strong property of predictable representation under a change in measure. In addition, we give conditions, in terms of statistical causality, for martingales to have strong and weak properties of predictable representation. The results are applied to the problem of pricing claims in incomplete financial markets. [ABSTRACT FROM AUTHOR]

This paper uses a heterogeneous‐agent overlapping‐generations model to examine the fiscal and distributional consequences of introducing a means test in US Social Security. I find that a means test, that is, conditioning benefit payments on a household's earnings or assets, leads to a higher implicit tax on old‐age resources, but has desirable distributional effects. A 75% cut in the benefits to households with earnings of more than 200% of the median leads to a 2.3% reduction in the overall size of Social Security, but has almost no effect on average dollar benefits. In contrast, a fiscally comparable payroll tax cut leads to an across‐the‐board decline of 2% in the average dollar benefits, despite an increase in capital and labor. A fiscally comparable delay in the benefit eligibility age increases benefits for all, but negatively affects capital and labor. Finally, an asset‐based means test causes a decline of 1% in the average dollar benefits, but has a large negative effect on capital and the accidental bequests left behind by deceased households. [ABSTRACT FROM AUTHOR]

The object of the investigation is a model of the incomplete financial market. It includes a bank deposit with a known interest rate and basic risky securities. The instant interest rate and volatility are governed by a hidden market regime, represented by some finite-state Markov jump process. The paper presents a solution to two problems. The first one consists of the characterization of the derivatives based on the existing market securities, which are valid to complete the considered market. It is determined that for the market completion, it is sufficient to add the number of derivatives equal to the number of possible market regimes. A generalization of the classic Black–Scholes equation, describing the evolution of the fair derivative price, is obtained along with the structure of a self-financing portfolio, replicating an arbitrary contingent claim in the market. The second problem consists of the online estimation of the market regime, given the observations of both the underlying and derivative prices. The available observations are either a combination of the time-discretized risky security prices or some high-frequency multivariate point processes associated with these prices. The paper presents the numerical algorithms of the market regime tracking for both observation types. The comparative numerical experiments illustrate the high quality of the proposed estimates. [ABSTRACT FROM AUTHOR]

We analyze how market power by traders on local agricultural spot markets affects investment in crop quality by smallholders in a context with "imperfect institutions"—without third-party contract enforcement and with incomplete input markets. Farmers and traders can engage in relational contracting where the promise of future rents supports current cooperation. We analyze informal contracting under the shadow of side selling by the farmer and ask how changes in the competitiveness of local markets affect flows of inputs in relational contracts. When local markets become more competitive, fewer farmers are included in relational contracting with traders, and farmers who remain in such relationships receive less support from traders. We document empirical evidence from local wheat markets in Ethiopia that is consistent with the theory. [ABSTRACT FROM AUTHOR]

Variable annuities (VAs) and other long-term equity-linked insurance products are typically difficult to hedge in the incomplete markets. A state-dependent fee tied with market volatility for VAs is designed to contribute the risk-sharing mechanism between policyholders and insurers. Different from prior research, we discuss several aspects on a fair valuation, fee-rate determination and hedging with volatility-dependent fees from the perspective of a VA hedger. A method of efficient hedging strategy as a benchmark compared to other strategies is developed in the stochastic volatility setting. We illustrate this method in guaranteed minimum maturity benefits (GMMBs), but it is also applicable to other equity-linked insurance contracts. [ABSTRACT FROM AUTHOR]

We use supervised machine learning to approximate the expectations typically contained in the optimality conditions of an economic model in the spirit of the parameterized expectations algorithm (PEA) with stochastic simulation. When the set of state variables is generated by a stochastic simulation, it is likely to suffer from multicollinearity. We show that a neural network‐based expectations algorithm can deal efficiently with multicollinearity by extending the optimal debt management problem studied by Faraglia, Marcet, Oikonomou, and Scott (2019) to four maturities. We find that the optimal policy prescribes an active role for the newly added medium‐term maturities, enabling the planner to raise financial income without increasing its total borrowing in response to expenditure shocks. Through this mechanism, the government effectively subsidizes the private sector during recessions. [ABSTRACT FROM AUTHOR]

We study insider trading in a jump-binomial model of the financial market that is based on a marked binomial process and that serves as a suitable alternative to some classical trinomial models. Our investigations focus on the two main questions: measuring the advantage of the insider's additional information and stating a closed form for her hedging strategy. Our approach is based on the results of enlargement of filtration in a discrete-time setting stated by Blanchet-Scalliet and Jeanblanc (in: From probability to finance, Springer, Berlin, 2020) and on a stochastic analysis for marked binomial processes developed in the companion paper (Halconruy in Electron J Probab 27:1–39, 2022). Our work provides in a discrete-time and an incomplete market setting the analogues of some results of Amendinger et al. (Stoch Process Appl 89(1):101–116, 2000; Finance Stoch 7(1):29–46, 2003), Imkeller et al. (1998, 2006) and extends in an insider framework some utility maximization results stated in Delbaen and Schachermayer (The mathematics of arbitrage, Springer, Berlin, 2006) and in Runggaldier et al. (in: Seminar on stochastic analysis, random fields and applications III, Springer, Berlin, 2002). [ABSTRACT FROM AUTHOR]

The paper studies asset pricing for stochastic discrete time stock market models. The possibility of statistical evaluation of the market completeness is investigated. It is known that the market completeness is not a robust property: small random deviations of the coefficients convert a complete market model into a incomplete one. The paper investigates if market incompleteness is robust. It is found that market incompleteness is a non-robust property as well. This is demonstrated for a basic single stock stochastic market model. This implies that, for any incomplete market from a wide class of discrete time models, there exists a complete market model with arbitrarily close stock prices. This means that incomplete markets are indistinguishable from the complete markets in the terms of market statistics. [ABSTRACT FROM AUTHOR]

I model an incomplete markets economy where unaware agents do not perceive all states of nature, so unintended default can occur when asset returns differ from what was perceived. The presence of default plays a crucial role in the proof of existence—particularly in economies where beliefs are biased—by removing perceived arbitrage opportunities with respect to delivery‐adjusted asset returns. The First Fundamental Welfare Theorem fails because of default and pecuniary inefficiencies, but the Second Fundamental Welfare Theorem holds for economies with no aggregate risk. Welfare is shown to not necessarily be monotonic in discovery or the increasing of awareness. [ABSTRACT FROM AUTHOR]

This paper proposes a novel method to compute the Krusell and Smith (1997, 1998) algorithm, used for solving heterogeneous-agents models with aggregate risk and incomplete markets when households can save in more than one asset. When used to solve a model with more than one asset, the standard algorithm has to impose equilibria for each additional asset (find the market-clearing price) in each period simulated. This procedure entails root-finding in each period, which is computationally expensive. I show that it is possible to avoid root-finding at this level by not imposing equilibria each period, but instead temporarily suspending market clearing. The proposed method then updates the law of motion for asset prices by using the information on the excess demand for assets via a Newton-like method. Since the method avoids the root-finding for each time period simulated, it leads to a significant reduction in computation time. In the example model with two assets, the proposed version of the algorithm leads to an 80% decrease in computational time, even when measured conservatively. This method is potentially useful in computing general equilibrium asset-pricing models with risky and safe assets, featuring both aggregate and uninsurable idiosyncratic risk, since methods that use linearisation in the neighborhood of the aggregate steady state are considered to be less accurate than global solution methods for such models. [ABSTRACT FROM AUTHOR]

We study a pure-exchange incomplete-market economy with heterogeneous agents. In each period, the agents choose how much to save (i.e., invest in a risk-free bond), how much to consume, and which bundle of goods to consume while their endowments are fluctuating. We focus on a competitive stationary equilibrium (CSE) in which the wealth distribution is invariant, the agents maximize their expected discounted utility, and both the prices of consumption goods and the interest rate are market-clearing. Our main contribution is to extend some general equilibrium results to an incomplete-market Bewley-type economy with many consumption goods. Under mild conditions on the agents' preferences, we show that the aggregate demand for goods depends only on their relative prices and that the aggregate demand for savings is homogeneous of degree in prices, and we prove the existence of a CSE. When the agents' preferences can be represented by a CES (constant elasticity of substitution) utility function with an elasticity of substitution that is higher than or equal to one, we prove that the CSE is unique. Under the same preferences, we show that a higher inequality of endowments does not change the equilibrium prices of goods and decreases the equilibrium interest rate. Our results shed light on the impact of market incompleteness on the properties of general equilibrium models. [ABSTRACT FROM AUTHOR]

In this paper we are dealing with a robust investment-consumption optimization problem in an incomplete market with a switching regime stochastic interest rate. Our methodology combines duality approach with stochastic control techniques (applied to the dual problem) specific to a non-Markovian setting, such as dynamic programming principle (initiated in Karoui and Quenez (SIAM J Control Optim 33(1):29–66, 1995)) and Backward Stochastic Differential Equations (BSDEs) theory. An auxiliary dual problem is established by means of infinite-dimensional convex duality. We derive explicit formulas for the optimal trading strategy and consumption rate in terms of the solution of some nonstandard BSDE with jumps. Links to other significant results in the domain are also provided. [ABSTRACT FROM AUTHOR]

SYNOPSIS: Prior research documents market responses to quarterly updates to annual risk factor disclosures, suggesting quarterly risk factor updates are informative. In this study, we explore whether future equity returns are associated with quarterly risk factor updates and whether updates containing more focused and specific language affect this relationship. We find that firms with quarterly risk factor updates experience lower future abnormal returns, relative to firms without updates, suggesting that, on average, the market reaction to quarterly risk factor updates is incomplete at the time the 10-Q is filed. This incomplete market reaction is driven primarily by the group of updates that is important yet is less specific about the effects of the risk on firm fundamentals. We also find that analysts underreact to the same group of risk factor updates associated with the market underreaction. JEL Classifications: D8; G14; M41; M48. [ABSTRACT FROM AUTHOR]

This paper explores the implications of consumption heterogeneity between domestic and foreign investors on the cross-section of stock returns in a host country. We argue that foreign investors in a small open economy integrated into global financial markets may face consumption risk, which could result in risk premia being reflected in stock returns. To account for the potential influence of foreign investors on asset prices in a host country, we develop a two-country durable consumption model under market incompleteness, which extends the one-country durable consumption model. The proposed model includes both domestic and foreign pricing factors. We investigate the empirical performance of our model with Fama–French portfolios for Korea, taking U.S. investors as representative foreign investors. The empirical results advocate the two-country durable consumption model, confirming the significant role of foreign factors in the cross-section of domestic stock returns. Additionally, R 2 tests conducted with different sets of test assets show that the explanatory power of our model is comparable to that of the Fama–French three-factor model. [ABSTRACT FROM AUTHOR]

We study the valuation of a pension fund's obligations in a discrete time and space incomplete market model. The market's incompleteness stems from the non-replicability of the wage process that finances the pension plan through time. The contingent defined-benefit liability of the pension fund is a function of the wages, which can be seen as the payoff of a path-dependent derivative security. We apply the notion of the super-hedging value and propose its difference from the current pension's fund capital as a measure of distance to liability hedging. The induced closed-form expressions of the values and the related investment strategies provide insightful comparative statistics. Furthermore, we use a utility-based optimization portfolio to point out that in cases of sufficient capital, the application of a subjective investment criterion may result in heavily different strategies than the super-hedging one. This means that the pension fund will be left with some liability risk, although it could have been fully hedged. Finally, we provide conditions under which the effect of a possible early exit leaves the super-hedging valuation unchanged. [ABSTRACT FROM AUTHOR]

In response to the unprecedented uncertain rare events of the last decade, we derive an optimal portfolio choice problem in a semi-closed form by integrating price diffusion ambiguity, volatility diffusion ambiguity, and jump ambiguity occurring in the traditional stock market and the cryptocurrency market into a single framework. We reach the following conclusions in both markets: first, price diffusion and jump ambiguity mainly determine detection-error probability; second, optimal choice is more significantly affected by price diffusion ambiguity than by jump ambiguity, and trivially affected by volatility diffusion ambiguity. In addition, investors tend to be more aggressive in a stable market than in a volatile one. Next, given a larger volatility jump size, investors tend to increase their portfolio during downward price jumps and decrease it during upward price jumps. Finally, the welfare loss caused by price diffusion ambiguity is more pronounced than that caused by jump ambiguity in an incomplete market. These findings enrich the extant literature on effects of ambiguity on the traditional stock market and the evolving cryptocurrency market. The results have implications for both investors and regulators. [ABSTRACT FROM AUTHOR]

In this paper, we examine the valuations of equity-indexed annuities (EIAs) when their reference stocks distribute stochastic dividends. Due to the fact that stocks typically pay dividends at discrete times after the payment dates are announced, pricing EIAs with dividends is deemed to be practically significant. We directly model the discrete dividend payments using the jump diffusion process with regime switching, and then determine the dynamics of the stock price. The equivalent martingale measure of fair valuation in incomplete markets is determined by employing the Esscher transform. Finally, the pricing formulas of several of the most common EIAs in the market under the stochastic dividend model are obtained. Our model incorporates and extends the present literature on EIAs with accurate and effective valuation methods. [ABSTRACT FROM AUTHOR]

I replicate all tables and figures from fourteen papers in Quantitative Macroeconomics, with an emphasis on incomplete market heterogeneous agent models. I report three main findings: (i) all (non-welfare related) major findings of the papers replicate, (ii) welfare findings based on linear approximation methods—1st-order perturbation, linear and log-linearization around steady-state, and linear-quadratic methods—should be treated as quantitatively suspect, (iii) decisions around methods for discretizing exogenous shocks have a large and unappreciated influence on results and should be prominently discussed in papers. While some smaller aspects of the papers do not replicate exactly, rather than nitpick in the body of this paper I instead describe some lessons learnt that may be useful for practitioners working with Quantitative Macroeconomic models. The replications use global methods allowing for non-linearities and I argue that these are important and need to be more widely used. I provide a checklist that researchers can use when trying to check that their work will be more easily reproducible. Matlab codes implementing the replications using the VFI Toolkit are provided, and full results of all replications are given in the online appendix. I conclude with three core points for best practice: (i) codes be made directly available (e.g., on github, not only 'on request', and not just inside a zip file), (ii) report not just baseline parameters but also hyperparameters, equilibrium values, non-baseline parameters and initial conditions, and (iii) replication means rewriting codes from scratch, not just re-running available codes. [ABSTRACT FROM AUTHOR]

This paper introduces and studies a new family of diffusion models for stock prices with applications in portfolio optimization. The diffusion model combines (stochastic) elasticity of volatility (EV) and stochastic volatility (SV) to create the SEV-SV model. In particular, we focus on the SEV component, which is driven by an Ornstein–Uhlenbeck process via two separate functional choices, while the SV component features the state-of-the-art 4/2 model. We study an investment problem within expected utility theory (EUT) for incomplete markets, producing closed-form representations for the optimal strategy, value function, and optimal wealth process for two different cases of prices of risk on the stock. We find that when EV reverts to a GBM model, the volatility and speed of reversion of the EV have a strong impact on optimal allocations, and more aggressive (bull markets) or cautious (bear markets) strategies are hence recommended. For a model when EV reverts away from GBM, only the mean reverting level of the EV plays a role. Moreover, the presence of SV leads mainly to more conservative investment decisions for short horizons. Overall, the SEV plays a more significant role than SV in the optimal allocation. [ABSTRACT FROM AUTHOR]

This paper studies the portfolio selection problem where tradable assets are a bank account, and standard put and call options are written on the S&P 500 index in incomplete markets in which there exist bid–ask spreads and finite liquidity. The problem is mathematically formulated as an optimization problem where the variance of the portfolio is perceived as a risk. The task is to find the portfolio which has a satisfactory return but has the minimum variance. The underlying is modeled by a variance gamma process which can explain the extreme price movement of the asset. We also study how the optimized portfolio changes subject to a user's views of the future asset price. Moreover, the optimization model is extended for asset pricing and hedging. To illustrate the technique, we compute indifference prices for buying and selling six options namely a European call option, a quadratic option, a sine option, a butterfly spread option, a digital option, and a log option, and propose the hedging portfolios, which are the portfolios one needs to hold to minimize risk from selling or buying such options, for all the options. The sensitivity of the price from modeling parameters is also investigated. Our hedging strategies are decent with the symmetry property of the kernel density estimation of the portfolio payout. The payouts of the hedging portfolios are very close to those of the bought or sold options. The results shown in this study are just illustrations of the techniques. The approach can also be used for other derivatives products with known payoffs in other financial markets. [ABSTRACT FROM AUTHOR]

The correction notice in the Scientific Reports journal addresses an error in the Supplementary Information file for the article "Quantum computational finance for martingale asset pricing in incomplete markets." The correct Supplementary Information file is now available online, and the original article can be accessed at https://doi.org/10.1038/s41598-024-68838-1. The authors of the article are Patrick Rebentrost, Alessandro Luongo, Bin Cheng, Samuel Bosch, and Seth Lloyd. [Extracted from the article]

The theme addressed in this article is the organic food market of Family farming with food companies and restaurants in Santa Cruz do Sul and its impact on the formation of short chains of commercialization of these products. The theoreticalmethodological approach is referenced in the work of the French Moroccan economist Hassan Zaoual (2006), entitled New Economy of Local Initiatives - an introduction to post-global thinking, which brings the discussion of Symbolic Sites of Belonging, understood as bearers of a plurality of modes of coordination (gift, solidarity, reciprocity, cooperation, socialization, reciprocal learning), which fill the incompleteness of the market that generates uncertainty. The research was limited to the region of Santa Cruz do Sul, where owners of four restaurants, located in the central area of the city, and an industrial restaurant that provides outsourced meal service, were interviewed, and four family farmers who produce and sell organic food in the region. The results show that the organic production of family farming practiced in the region is guided by the principles of Agroecology and that these products are identified as differentials in the menus of restaurants, evidencing prospects for expanding the demand for organic foods in the region. [ABSTRACT FROM AUTHOR]

We consider a stochastic financial exchange economy with a finite date-event tree representing time and uncertainty and a financial structure with possibly long-term assets. We address the question of the continuity of the set of marketable payoffs with respect to the asset prices. In a previous paper, we have exhibited a sufficient condition, which is based only on the returns of the assets. However, it is never satisfied in the structures with re-trading [See Bonnisseau and Chéry (Ann Finance 10:523–552, 2014)], which is a very common feature in many papers following the model of Magill and Quinzii (Theory of Incomplete Markets, MIT Press, Cambridge, 1996). The main purpose of this paper is to address this issue. We exhibit a new sufficient condition for general financial structures, which enjoys the property to be inherited by the re-trading extension of a financial structure. So, we pave the way for equilibrium existence results under assumptions only on the fundamentals of the economy. [ABSTRACT FROM AUTHOR]

This paper investigates the conditions under which socially responsible investment (SRI) is neutral from the viewpoint of general equilibrium theory. Three conditions are jointly sufficient for neutrality of SRI. First, the financial market is complete and SRI does not compromise the spanning opportunities it provides. Second, consumers' rankings of consumption bundles are unaffected by their asset holdings. Third, firms maximize shareholder value. Under an additional assumption that is satisfied, e.g., if SRI takes the form of negative screening, the taxes and transfers needed to implement a Pareto‐optimal allocation are the same as in the absence of SRI. SRI is neutral despite financial market incompleteness if there are perfect substitutes for targeted stocks. [ABSTRACT FROM AUTHOR]

In this paper we discuss the concept of the cost‐of‐capital (CoC) rate for an insurance company as an equilibrium in the economic triangle of policyholders, shareholders, and the regulator. This provides a possible rationalization and an economic foundation for a quantity that is widely used in practice but whose value is typically neither technically nor economically well justified. We show how it can be well founded in such a triangular equilibrium. Under a simple one‐period model and a valuation procedure of a two‐price economy for illiquid assets we provide a corresponding economic‐theoretical quantification for the CoC rate. The resulting rates are illustrated by a number of concrete numerical examples. [ABSTRACT FROM AUTHOR]

For many years, the post‐earnings announcement drift (PEAD) has been accepted as an anomaly to the efficient markets hypothesis. This drift subsequent to earnings announcements has been ascribed to the incomplete incorporation by the market of the information in these earnings announcements. Interestingly, over the past five decades of extensive research, no rational economic explanation of the PEAD has been found. In addition, there has been no specific consideration of the effect of new economic information subsequent to the earnings announcements. Our multi‐year examination of the cumulative abnormal return (CAR) incorporates the effect of economic information subsequent to the earnings announcement of traditional PEAD studies. Our analysis shows that a drift of CAR versus time can arise without recourse to invoking market inefficiency. Our results are consistent for three samples covering the period 1974–2016. We do not assert that we prove that there is no component of the traditional PEAD due to market inefficiency. Rather, our results show that studies to determine whether there is a market inefficiency component of the PEAD should use a multi‐period approach in order to account for the effect of economic information subsequent to the earnings announcements and thereby focus more precisely upon the cause of the PEAD reported in previous research studies. [ABSTRACT FROM AUTHOR]

A standing question in the theory of matching markets is how to define stability under incomplete information. This paper proposes an epistemic approach. Agents negotiate through offers, and offers are interpreted according to the highest possible degree of rationality that can be ascribed to their proponents. A matching is deemed "stable" if maintaining the current allocation is a rationalizable action for each agent. The main result shows an equivalence between this notion and "incomplete‐information stability," a cooperative solution concept put forward by Liu, Mailath, Postlewaite, and Samuelson (2014) for markets with incomplete information. [ABSTRACT FROM AUTHOR]

Motivated by the empirical evidence of the effects of unanticipated nominal interest rate increases on the evolution of household inequality in Mexico, which highlight the importance of insurance mechanisms to deal with idiosyncratic risks, the paper uses a Heterogeneous Agent New Keynesian model to analyze the relationship between monetary policy and household inequality. The model is able to capture the main features that characterise both the business cycle dynamics, as well as the distribution of income and wealth. Results indicate that heterogeneity affects the transmission of monetary policy, and that the design of monetary policy has important distributive effects.

Why do some incomplete information markets feature intermediaries while others do not? I study the allocation of two goods in an incomplete information setting with a single principal, multiple agents with unit demand, and interdependent valuations. I construct a novel dynamic mechanism implemented by a principal who faces a set of intermediaries, each of whom represents an ex ante identical set of agents. This mechanism has a unique (up to permutation) weak perfect Bayesian equilibrium. The dynamic mechanism is inefficient with positive probability. Nevertheless, under mild conditions the agents are ex ante better off under the dynamic mechanism relative to a Vickrey-like auction because the intermediaries are more able to exploit information asymmetries in the dynamic mechanism than agents are able to exploit information asymmetries in the Vickrey-like auction. Finally, I show that in large markets the dynamic mechanism and Vickrey-like auction have the same expected total surplus. The comparison between the two mechanisms gives a stylized intuition for the hierarchical structure of larger markets and institutions. [ABSTRACT FROM AUTHOR]

Large‐scale farmers' sales methods and prices are crucial for them to realize their production value. In this study, we consider conditions that involve incomplete insurance, futures, and product markets to construct a sales decision‐making analysis framework for large‐scale farmers and to reveal the influence mechanism of different sales methods. We empirically examine data from field surveys and subjective preference experiments involving 373 large‐scale grain farmers in four provinces in China. The results reveal that large‐scale farmers' ability to anticipate prices and their degree of risk aversion are important for their choices of sales methods because of the incomplete insurance, futures, and product markets in developing countries. Price expectations reflect farmers' judgments of future price trends. Therefore, large‐scale farmers who anticipate an increase in grain prices will choose to postpone grain sales to potentially maximize profits. The degree of risk aversion determines whether farmers will sell several times to avoid normalized price volatilities. Risk‐averse large‐scale farmers will choose a multiperiod sales method, while risk‐loving ones will choose a single‐period delayed sales method. [ABSTRACT FROM AUTHOR]