Essays on robust asset pricing
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Ferenc Horváth: Tilburg University, School of Economics and Management
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The central concept of this doctoral dissertation is robustness. I analyze how model and parameter uncertainty affect financial decisions of investors and fund managers, and what their equilibrium consequences are. Chapter 1 gives an overview of the most important concepts and methodologies used in the robust asset allocation and robust asset pricing literature, and it also reviews the most recent advances thereof. Chapter 2 provides a resolution to the bond premium puzzle by featuring robust investors, and – as a technical contribution – it develops a novel technique to solve robust dynamic asset allocation problems: the robust version of the martingale method. Chapter 3 contributes to the resolution of the liquidity premium puzzle by demonstrating that parameter uncertainty generates an additional, positive liquidity premium component, the liquidity uncertainty premium. Chapter 4 examines the effects of model uncertainty on optimal Asset Liability Management decisions.
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