Date of Award
Doctor of Philosophy (PhD)
State of the arts equilibrium models explain several financial markets' regularities but still miss many important dimensions. My research investigates the existing wedge between theoretical and actual prices and its implications for investment decisions. In the first chapter, I develop a new approach to locate and quantify the wedge between the main-stream Representative Agent pricing of the U.S. market portfolio and actual data. The determinants of the wedge are high uncertain and illiquid recessionary periods where, according to the marginal pricing rules, more efficient portfolios than the market can be formed. Since illiquidity is a major determinant, chapter two and three are devoted to the theoretical and empirical study of the impact of transaction costs on the optimal formation of equilibrium portfolios. Chapter two develops a single-period Mean-Variance theory able to solve large scale portfolio optimization problems in the presence of fixed and variable costs. Chapter three shows its relevance in the representative context of the FX markets.
Chair and Committee
Phillip H. Dybvig
Phillip H. Dybvig, Guofu Zhou, Ohad Kadan, Thomas A. Maurer,
Pezzo, Luca, "On the Wedge between Theoretical and Actual Prices and its Implications for Investment Decisions" (2018). Arts & Sciences Electronic Theses and Dissertations. 1567.