The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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DISCUSSION
Published: 05/01/1983 | DOI: 10.1111/j.1540-6261.1983.tb02253.x
BERNARD DUMAS
Incomplete‐Market Equilibria Solved Recursively on an Event Tree
Published: 09/12/2012 | DOI: 10.1111/j.1540-6261.2012.01775.x
BERNARD DUMAS, ANDREW LYASOFF
Because of non‐traded human capital, real‐world financial markets are massively incomplete, while the modeling of imperfect, dynamic financial markets remains a wide‐open and difficult field. Some 30 years after Cox, Ross, and Rubinstein (1979) taught us how to calculate the prices of derivative securities on an event tree by simple backward induction, we show how a similar formulation can be used in computing heterogeneous‐agents incomplete‐market equilibrium prices of primitive securities. Extant methods work forward and backward, requiring a guess of the way investors forecast the future. In our method, the future is part of the current solution of each backward time step.
The Dynamic Properties of Financial‐Market Equilibrium with Trading Fees
Published: 12/12/2018 | DOI: 10.1111/jofi.12744
ADRIAN BUSS, BERNARD DUMAS
We incorporate trading fees into a dynamic, multiagent general‐equilibrium model in which traders optimally decide when to trade. For that purpose, we propose an innovative algorithm that synchronizes the traders. Securities prices are not so much affected by the payment of the fees itself, but rather by the trade‐off that the traders face between smoothing consumption and smoothing holdings. In calibrated examples, the interest rate and welfare decline with trading fees, while risk premia and volatilities increase. Liquidity risk and expected liquidity are priced, leading to deviations from the consumption‐CAPM. With trading fees, capital is slow‐moving, generating slow price reversal.
OPTIMAL INTERNATIONAL ACQUISITIONS
Published: 03/01/1975 | DOI: 10.1111/j.1540-6261.1975.tb03157.x
Michael Adler, Bernard Dumas
The World Price of Foreign Exchange Risk
Published: 06/01/1995 | DOI: 10.1111/j.1540-6261.1995.tb04791.x
BERNARD DUMAS, BRUNO SOLNIK
Departures from purchasing power parity imply that different countries have different prices for goods when a common numeraire is used. Stochastic changes in exchange rates are associated with changes in these prices and constitute additional sources of risk in asset pricing models. This article investigates whether exchange rate risks are priced in international asset markets using a conditional approach that allows for time variation in the rewards for exchange rate risk. The results for equities and currencies of the world's four largest equity markets support the existence of foreign exchange risk premia.
An Exact Solution to a Dynamic Portfolio Choice Problem under Transactions Costs
Published: 06/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb02675.x
BERNARD DUMAS, ELISA LUCIANO
The presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor. It requires one to either act or do nothing, an issue which, of course, does not arise in frictionless situations. The investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all. His objective is to maximize the expected utility derived from that terminal consumption. We postpone the terminal point far into the future to obtain a stationary portfolio rule. The portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate. We show how to calculate them.
Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility
Published: 03/13/2009 | DOI: 10.1111/j.1540-6261.2009.01444.x
BERNARD DUMAS, ALEXANDER KURSHEV, RAMAN UPPAL
Our objective is to identify the trading strategy that would allow an investor to take advantage of “excessive” stock price volatility and “sentiment” fluctuations. We construct a general equilibrium “difference‐of‐opinion” model of sentiment in which there are two classes of agents, one of which is overconfident about a public signal, while still optimizing intertemporally. Overconfident investors overreact to the signal and introduce an additional risk factor causing stock prices to be excessively volatile. Consequently, rational investors choose a conservative portfolio; moreover, this portfolio depends not just on the current price divergence but also on their prediction about future sentiment and the speed of price convergence.
DISCUSSION
Published: 05/01/1977 | DOI: 10.1111/j.1540-6261.1977.tb03289.x
Bernard Dumas, James H. Scott
Implied Volatility Functions: Empirical Tests
Published: 12/17/2002 | DOI: 10.1111/0022-1082.00083
Bernard Dumas, Jeff Fleming, Robert E. Whaley
Derman and Kani (1994), Dupire (1994), and Rubinstein (1994) hypothesize that asset return volatility is a deterministic function of asset price and time, and develop a deterministic volatility function (DVF) option valuation model that has the potential of fitting the observed cross section of option prices exactly. Using S&P 500 options from June 1988 through December 1993, we examine the predictive and hedging performance of the DVF option valuation model and find it is no better than an ad hoc procedure that merely smooths Black–Scholes (1973) implied volatilities across exercise prices and times to expiration.
Pass‐through and Exposure
Published: 12/17/2002 | DOI: 10.1111/1540-6261.00420
Gordon M. Bodnar, Bernard Dumas, Richard C. Marston
Firms differ in the extent to which they “pass through” changes in exchange rates into foreign currency prices and in their “exposure” to exchange rates—the responsiveness of their profits to changes in exchange rates. Because pricing affects profitability, a firm's pass‐through and exposure should be related. This paper develops models of exporting firms under imperfect competition to study these related phenomena. From these models we derive the optimal pass‐through decisions and the resulting exchange rate exposure. The models are estimated on eight Japanese export industries using both the price data pass‐through and financial data for exposure.