Does the famous idiom “stocks for the long run” have an empirical or a theoretical foundation? Bali et al. (2009) show that the cumulative return distributions of stocks and bonds intersect for all investment horizons, implying that stocks do not dominate bonds, regardless of the horizon. This paper shows that adding the riskless asset to the analysis yields a clear-cut dominance of stocks over bonds: for any combination of bonds with the riskless asset, one can find a combination of stocks with the riskless asset that dominates it. This dominance holds for all non-decreasing preferences as long as the investment horizon is 3 years or longer. However, this strong result does not imply that arbitrage opportunities exist.

Peer-effects have been shown to affect behavior, and can generally lead to investments choices that are mean–variance inefficient. This paper analyzes optimal diversification with peer-effects. We show that if individuals have keeping-up with the Joneses preferences and they take their peer-group reference as the market portfolio, Markowitz’s mean–variance efficiency analysis and the CAPM equilibrium are intact. This holds for any keeping-up preferences, as well as heterogeneous combinations of such preferences. These results also extend to the Merton–Levy segmented-market model.

We find that weekend, holiday and overnight trading breaks generate excessive perceived risk in the option markets, presumably due to asymmetric information, which, in turn, encourages uninformed option traders to postpone trading. This perceived risk subsides after two days accompanied by an increase in the option trading volume and the underlying index’s actual price volatility. These results shed light on the informational role of index options and suggest that the theoretical models’ results regarding information processing and price discovery in the presence of private information are not limited to single stocks but also apply to the market as a whole.

Over the last 15years, dramatically decreasing foreign investment costs have not reduced the home bias. We show that the home bias induced by a given cost is proportional to the factor ρ/(1−ρ), where ρ is the average correlation between markets. This factor is very sensitive to the correlation, especially when the correlation is high. Empirically, correlations have been steadily increasing from 0.4 in the 90’s to about 0.9 today. Thus, the decreasing extra costs are increasingly magnified, explaining the persistence of the home bias, and predicting its continuation.

Roy’s [Roy, A., 1952. Safety first and the holding of assets. Econometrica 20 (3), 431–449] safety first criterion advocates the minimization of the probability of outcomes below a certain “disaster” level. This paper examines safety first theoretically and experimentally. We find that safety first plays a crucial role in decision-making, inducing choices that cannot be explained by, and even contradict, risk-aversion, Prospect Theory, and loss-aversion in general. Yet, safety first alone cannot explain individual choice. Therefore, we propose an expected utility – safety first (EU–SF) model where decisions are made based on a weighted average of the safety first criterion and standard expected utility maximization. We experimentally estimate these relative weights, and discuss their economic implications.

This paper provides new evidence on the time-series predictability of stock market returns by introducing a test of nonlinear mean reversion. The performance of extreme daily returns is evaluated in terms of their power to predict short- and long-horizon returns on various stock market indices and size portfolios. The paper shows that the speed of mean reversion is significantly higher during the large falls of the market. The parameter estimates indicate a negative and significant relation between the monthly portfolio returns and the extreme daily returns observed over the past one to eight months. Specifically, in a quarter in which the minimum daily return is −2% the expected excess return is 37 basis points higher than in a month in which the minimum return is only −1%. This result holds for the value-weighted and equal-weighted stock market indices and for each of the size decile portfolios. The findings are also robust to different sample periods, different indices, and investment horizons.

Levy and Markowitz showed, for various utility functions and empirical returns distributions, that the expected utility maximizer could typically do very well if he acted knowing only the mean and variance of each distribution. Levy and Markowitz considered only situations in which the expected utility maximizer chose among a finite number of alternate probability distributions. The present paper examines the same questions for a case with an infinite number of alternate distributions, namely those available from the standard portfolio constraint set.

Market efficiency is often evaluated through the ability of fundamental analysis or technical trading rules to exploit predictable patterns in asset prices. The evidence following decades of empirical research is mixed. This paper reexamines the evidence using a novel database from the TV show “Talking Numbers.” We assess the performance of 1,599 investment recommendations, where each recommendation features a fundamental and a technical forecast. We show that technicians are able to predict individual stock returns to economically significant degrees up to a one-year horizon. Beyond that, the null hypothesis of market efficiency is not rejected for market-wide indices, equity sectors, bonds, or commodities.