Portfolio selection with two-stage preferences

We propose a model of portfolio selection under ambiguity, based on a two-stage valuation procedure which disentangles ambiguity and ambiguity aversion. The model does not imply “extreme pessimism” from the part of the investor, as multiple priors models do. Furthermore, its analytical tractability allows to study complex problems thus far not analyzed, such as joint uncertainty about means and variances of returns.     

Bond risk premia,macroeconomic fundamentals and the exchange rate

We propose a two-country no-arbitrage term-structure model to analyze the joint dynamics of bond yields, macroeconomic variables and the exchange rate. The model allows to understand how exogenous shocks to the exchange rate affect the yield curves, how bond yields co-move in different countries and how the exchange rate is influenced by interest rates, macro-economic variables and time-varying bond risk premia.Estimating the model with US and German data, we find that time-varying bond risk premia account for a significant portion of the variability of the exchange rate: apparently, a currency tends to appreciate when investors expect large capital gains on long-term bonds denominated in that currency. A number of other novel empirical findings emerge.     

PORTFOLIO SELECTION WITH MONOTONE MEAN-VARIANCE PREFERENCES

We propose a portfolio selection model based on a class of monotone preferences that coincide with mean-variance preferences on their domain of monotonicity, but differ where mean-variance preferences fail to be monotone and are therefore not economically meaningful. The functional associated with this new class of preferences is the best approximation of the mean-variance functional among those which are monotonic. We solve the portfolio selection problem and we derive a monotone version of the capital asset pricing model (CAPM), which has two main features: (i) it is, unlike the standard CAPM model, arbitrage free, (ii) it has empirically testable CAPM-like relations. The monotone CAPM has thus a sounder theoretical foundation than the standard CAPM and a comparable empirical tractability.     

Bond risk premia, macroeconomic fundamentals and the exchange rate

We propose a two-country no-arbitrage term-structure model to analyze the joint dynamics of bond yields, macroeconomic variables and the exchange rate. The model allows to understand how exogenous shocks to the exchange rate affect the yield curves, how bond yields co-move in different countries and how the exchange rate is influenced by interest rates, macro-economic variables and time-varying bond risk premia.Estimating the model with US and German data, we find that time-varying bond risk premia account for a significant portion of the variability of the exchange rate: apparently, a currency tends to appreciate when investors expect large capital gains on long-term bonds denominated in that currency. A number of other novel empirical findings emerge.