Abstract:
Is the elasticity of intertemporal substitution (EIS) more or less than one? This question can be answered by confronting theoretical results of asset pricing models with investor behaviour during episodes of stock market panic. If we consider these episodes as periods of high risk aversion, then lower asset prices are in fact associated with higher risk aversion. However, according to theoretical models, risky asset price is an increasing function of the coefficient of risk aversion only if the EIS exceeds unity. It may therefore be concluded that the EIS must be more than one to reconcile theory with the observed stock price decline during periods of panic.

Abstract:
The standard asset pricing models (the CCAPM and the Epstein-Zin non-expected utility model) counterintuitively predict that equilibrium asset prices can rise if the representative agent's risk aversion increases. If the income effect, which implies enhanced saving as a result of an increase in risk aversion, dominates the substitution effect, which causes the representative agent to reallocate his portfolio in favour of riskless assets, the demand for securities increases. Thus, asset prices are forced to rise when the representative agent is more risk adverse. By disentangling risk aversion and intertemporal substituability, we demonstrate that the risky asset price is an increasing function of the coefficient of risk aversion only if the elasticity of intertemporal substitution (EIS) exceeds unity. This result, which was first proved par Epstein (1988) in a stationary economy setting with a constant risk aversion, is shown to hold true for non-stationary economies with a variable or constant risk aversion coefficient. The conclusion is that the EIS probably exceeds unity.

Abstract:
In this paper we analyse financial implications of exchangeability and similar properties of finite dimensional random vectors. We show how these properties are reflected in prices of some basket options in view of the well-known put-call symmetry property and the duality principle in option pricing. A particular attention is devoted to the case of asset prices driven by Levy processes. Based on this, concrete semi-static hedging techniques for multi-asset barrier options, such as certain weighted barrier spread options, weighted barrier swap options or weighted barrier quanto-swap options are suggested.

Abstract:
In this paper, we consider a stochastic asset price model where the trend is an unobservable Ornstein Uhlenbeck process. We first review some classical results from Kalman filtering. Expectedly, the choice of the parameters is crucial to put it into practice. For this purpose, we obtain the likelihood in closed form, and provide two on-line computations of this function. Then, we investigate the asymptotic behaviour of statistical estimators. Finally, we quantify the effect of a bad calibration with the continuous time mis-specified Kalman filter. Numerical examples illustrate the difficulty of trend forecasting in financial time series.

Abstract:
in this paper we explore the contribution that asset prices appear to make to fluctuations in the economy and to inflation, and hence to monetary policy, using a large international panel for the 1970-2008 period. we show that house prices are important in the determination of economic activity, and therefore to monetary policy, but that stock market prices, while offering information in many periods, form a rather weaker and less well determined linkage. moreover, the effects are asymmetric over the course of the economic cycle. using an augmented taylor rule, we go on to show that monetary policy has not reacted much to asset prices but that longrun interest rates are clearly affected by house price inflation. relationships tend to be weaker in recent years, probably as a result of greater stability in output growth and inflation. nevertheless, our results suggest that central banks would do well to consider asset prices in deciding monetary policy.

Abstract:
the unfolding of the 2007 world financial and economic crisis has highlighted the vulnerability of real economic activity to strong fluctuations in asset prices. which is the optimal monetary policy in an economy like the colombian that is exposed to swings in asset prices? what is the implication, in terms of central bank losses, when it follows a standard simple rule instead of the optimal monetary policy? to answer these questions, we use a dynamic stochastic general equilibrium (dsge) model with physical capital and sticky wages for the colombian economy and derive the optimal monetary policy. then, we explore the dynamic effects of news about a future technology improvement, which turns out ex post to be overoptimistic, under the optimal policy rule and under alternative specifications of simple rules and definitions of the output gap.

Abstract:
Exchanges often impose daily limits for asset price changes. These restrictions have a direct impact on the prices of options traded on these assets. In this paper, we derive closed-form solution of option pricing formula when there are restrictions on changes in underlying asset prices. Using numerical examples, we illustrate that very often the impact of such restrictions on option prices is substantial.

Abstract:
Carlstrom and
Fuerst [“Asset Prices, Nominal Rigidities, and Monetary Policy,” Review of Economic Dynamics, Vol. 10, 2007,
pp. 256-275] find that a positive monetary policy response to share prices is a
source of equilibrium indeterminacy. In this note, we investigate the negative
response of a central bank to share prices. We find that a negative monetary
policy response to share prices is also a source of equilibrium indeterminacy.

Abstract:
We develop from basic economic principles a continuous-time model for a large investor who trades with a finite number of market makers at their utility indifference prices. In this model, the market makers compete with their quotes for the investor's orders and trade among themselves to attain Pareto optimal allocations. We first consider the case of simple strategies and then, in analogy to the construction of stochastic integrals, investigate the transition to general continuous dynamics. As a result, we show that the model's evolution can be described by a nonlinear stochastic differential equation for the market makers' expected utilities.

Abstract:
This paper aims at providing empirical evidence on the relationship between capital inflows and asset prices, focusing on China, Hong Kong, Indonesia, Korea and Thailand. Main findings are: the positive responses of share prices to portfolio inflows shocks were verified in all the estimated economies, which implies the function of the direct channel into stock market; the indirect channel through domestic money supply appeared to work in the economies with peg regime like Hong Kong, whereas it did not in those with floating regime like Indonesia, Korea and Thailand, due to the sterilization of intervention in foreign exchange markets.