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I would argue that indeed none of the so-called stylized facts you mentioned can be explained by classical economic theory. That there was a gross delta between the predictions of classical economic theory and empirical data was foremost found out by Benoit Mandelbrot as far back as 1963 in his seminal paper: The Variation of Certain Speculative Prices In ...


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The general effect of quantitative analysis of the markets is to enforce randomness. Suppose a strategic quant finds a predictable pattern where a stock always rises on Tuesdays. His institution will commence buying the stock every Monday, and selling on Tuesday. The trading itself pushes the stock price up on Monday and down on Tuesday (in general), so if ...


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I think there is a slight misconception into the purpose of an economic theory. The market is a complex entity to be modeled and yes, it is neither efficient nor arbitrage free but it is trading and there is a price process that corresponds to the market one. You could say that classical economic theory has failed, but I would argue the idea of a theory is ...


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Take logs of both sides, i.e. $$\log Y=\log A+ a \log K +(1-a)\log L$$ This gives: $$\Delta\log Y = \Delta\log A + a \Delta\log K +(1-a) \Delta\log L$$ Then use that $\frac{d}{dx}\log x= 1/x$, which yields $\Delta\log x=\Delta x/x$. Apply that to each log-diff above.


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IEX is an ATS. The ECN/ATS business is dominated by rampant and well known conflicts of interest. A part of the IEX value proposition from the beginning was to offer an alternative to traders who were disenfranchised by this market structure. If maker-taker rebates are part of your trading business model or if you engage in any strategy that could be deemed ...


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No. Actually "risk neutral pricing" does not make assumptions on the risk preferences of the agents. Securities are priced as if agents were risk neutral (that is to say as a straight expectation of discounted payoffs) but where probabilities of states of the world are not the true ones but they have been adjusted to reflect preferences. The math: Say ...


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The concept of entropy in the financial field is related to the market efficiency and predictability one; the measure approximate entropy by Pincus (1991) is considered as a market efficiency measure and it has been empirically proven it is correlated to the main market efficiency measures as shown by Eon & Kim (2008) and Risso (2008). I suggest you to ...


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Interest rate is 12%, we'll assume some kind of simple day count scheme like 30/360. Cash flows and discount factors for C payer t disc.fact. rcv.cf pay.cf rcv.pv 0 1 0 -2C 0 1 .88 800 0 704 2 .7744 800 -C 619.52 3 .681472 800 -C 545.18 4 .59969536 800 -C ...


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Classical economics cannot "explain" volatility smiles, but neither does it preclude their existence. Economics is far more abstract than financial "quant"modeling and answers very different questions. In the more abstract framework of economics, volatility skew, mean reverting volatility, bubbles, and crashes are all conceivable scenarios. ...


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That is true. Utility would not be concave anymore under prospect theory (only for gains), but convex for losses, which is evidence against CAPM. CAPM is valid either : -if the utility function is quadratic (which is nonsense in terms of economic interpretation, and in general, Von Neumann- Morgenstern utility describes poorly reality and should be ...


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The general problem of the investor is: $$ \max_{w\in[0,1]^n} U(\mu_p(w),\sigma_p(w))\quad s.t. \sum_{i=1}^n w_i=1$$ where $w$ being the portfolio weights, and $U$ utility function of portfolio risk $\sigma_p$ and return $\mu_p$. CAPM assumes investors with concave utility function $U=\mu_p-\frac{1}{2}\sigma_p^2$, from which then follows that all ...


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"Burn rate" is a measure of "spend rate" relative to cash on hand. So if you have $10 million dollars, and you spend $1 million dollars a month, you will "burn through" your cash in ten months, at which time your company will either "take off," get new financing, or go under. Strategies that rely on "burn rate" are risky ones. Nevertheless, they are ...


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In a world of uncertainty no one knows what future profits will be (especially > 1 year from now). All we can do is estimate. Who should we ask? The company management has an incentive to give out estimates that may be too optimistic. If you ask the competitors they are probably too pessimistic. Fortunately we have a machine called the stock market which ...



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