# Tag Info

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### Why stochastic dominance is "stochastic"?

In the below figure, CDF $F(\cdot)$ is first-order stochastically dominated by $G(\cdot)$. But $X_1$ and $X_2$ fall within the support of both distributions. So it would be possible to draw $X_1$ from ...

### An agent's expected utility depends only on mean and variance

In order to understand this problem, I will work through the generic case. Say that a user had generalized quadratic (Bernoulli) utility, similar to your problem: $$u(x) = \beta x^2 + \gamma x$$ and ...
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### An agent's expected utility depends only on mean and variance

\begin{eqnarray*} \displaystyle U(L) & = &\sum_{s=1}^{S}\pi_s U(Y_s) = \sum_{s=1}^{S} \left(-\frac{1}{2}\pi_s(\alpha - Y_s)^2\right) = -\frac{1}{2}\sum_{s=1}^{S} \left(\pi_s(\alpha^2 + Y_s^2-2\...
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### What is the equation $\mathbb{E}[mR]=1$?

This is an important result in financial economics (asset pricing) but not trivial to explain intuitively. I do my best to give you the big picture and get you started on your research. R is the ...

### Prove that variance of a portfolio cannot exceed variance of individual assets

Let $P = \alpha A + (1-\alpha) B$ where $A$ and $B$ are returns (random) from the two assets, and $P$ is their portfolio. Variance of portfolio $P$ can therefore be written as \begin{eqnarray*} \...
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### Financial Economics Textbooks

The recommended books are decent. From these two I'd go with Bailey first and if you're comfortable with that, then LeRoy & Werner. The latter requires some background in linear algebra and ...
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### Good Europe focused economics blogs

With a European view: The CEPR VOX EU: an economics blog created by the Centre for Economic Policy Research, which promotes research excellence and policy relevance in European economics. It covers a ...
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### Are no arbitrage models and equilibrium models equivalent?

...no-arbitrage models (such as Black-Scholes and HJM) are equivalent to equilibrium models (such as CAPM or C-CAPM). Short Answer Yes, for models where asset prices are assumed to be Ito ...
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### Is it common to see hedge funds go bankrupt?

Have any hedge funds gone bankrupt as a consequence of the "GameStop scandal"? This is very difficult, almost virtually impossible to say as events unfold. In order to understand why ...

### Most notable papers in Economics in 2021

This is an opinion question, but I'll give my opinion. In terms of methods, I like Arkhangelsky et al.'s synthetic diff-in-diff. In terms of applied economics, I liked Goncalves and Mello's study of ...

### Most notable papers in Economics in 2021

I think the randomized trial of mask effectiveness is one of the most notable economic papers in 2021. This is not a pure economics paper and it is published in science that does not specialize in ...

### Most notable papers in Economics in 2021

Some papers that interested me this year (in game theory): Subgame-perfect equilibrium in games with almost perfect information: Dispensing with public randomization They show the seminal result of ...
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### Prove that variance of a portfolio cannot exceed variance of individual assets

Let $w$ denote the weight on $A$ so that $1-w$ is the weight on $B$. Recall from the properties of variance that $\sigma_p^2 = w^2\sigma_A^2 + 2w(1-w)\sigma_A\sigma_B \rho_{AB}+ (1-w)^2\sigma_B^2$ ...
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### Who invented these key notions in Finance?

Net Present Value (NPV) as a soft concept existed probably even in antiquity but it was formalized and made popular by Irving Fisher in his book the Rate of Interest. Internal rate of return is ...
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### Properties of Financial Markets in Real Life

Equilibria: in the macroeconomic sense of aggregate equilibrium where all markets clear, markets are most likely never in any equilibrium but rather in constant flux between different equilibria, ...
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### Elasticity of demand functions

In the case of linear demand $d_i=a_i-x_iP$ (assuming $d_i$ is quantity demanded by individual $i$), the price elasticity of demand at point $(d_i,P)$ is \begin{equation} \epsilon_i(d_i,P)=x_i\cdot \...
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### Unresolved paradoxes or puzzles in financial economics

Merger paradox from industrial organization: I believe a fairly good overview is here: Garcia, F, Paz y Miño, JM, Torrens, G. The merger paradox, collusion, and competition policy. J Public Econ ...

### Most notable papers in Economics in 2021

Despite the fact that I am tired of reading paper's on natural experiments, there is one contribution in this field that captured my attention. Not only the topic is fascinating (Switzerland offered ...