All Questions
Tagged with asset-prices or asset-pricing
185 questions
0
votes
0
answers
18
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Consumption based asset pricing - covariance of consumption and returns impact on asset price
I'm reading about consumption based asset pricing model. I don't fully understand a basic equation below.
Let's start with the law:
$$
p_t = E_t\left[\beta \frac{u'(c_{t+1})}{u'(c_t)}p_{t+1}\right]
$$
...
- 111
3
votes
1
answer
101
views
Proof of utility function for CARA [1(a)] and CRRA equality with power coefficient [1(b)]
I went through the first chapter of Cochrane's Asset pricing and am completely stuck at the first question. I admit that I am an economics idiot, but there is totally no structure to this problem, ...
- 133
2
votes
0
answers
29
views
Stock price equation Nakamura and Steinsson (2018a)
I am in the process of deriving all equations in the DSGE model of Nakamura and Steinsson (2018a). So far, everything is derived correctly, but when I had a look into the replication files (https://...
- 23
1
vote
0
answers
44
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Flow budget constraint in a paper by Garleanu and Panageas
I am reading this paper and got confused by Equation (6) in said paper. Suppose there is an investor that can trade in riskless bonds that pay interest rate $r_t$, and holds a market portfolio with ...
1
vote
0
answers
43
views
Can we use the utility of discounted flows to do asset pricing?
Is it possible to do asset pricing by using the expected utility of the present value of all future discounted cash flows ? I aim to use this utility function to define an optimal portfolio, but I ...
0
votes
0
answers
9
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Are there studies that use the efficient market hypothesis to explain the impact of science in a given market?
I have data on an online market where sellers offer services such as social media bots. I have the following hypothesis: technological development and increased capabilities (e.g., better ...
- 113
3
votes
0
answers
55
views
Connection between pricing kernels and kernel methods in linear algebra
I'm trying to understand the idea of pricing kernels.
I have a maths/computer science background so I understand that kernel methods map information from "data" space into high-dimensional &...
1
vote
0
answers
33
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Difference in difference on election impact on asset prices?
I am looking to research the impact of Brexit on the FTSE100 index.
FTSE100 is an stock index of the 100 largest UK companies. The UK also has FTSE250 which is an index of 250 mid-cap companies (not ...
- 111
1
vote
1
answer
47
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Put Call Parity Question - Calculating Risk free rate ; has my professor left something out or is it possible?
You buy a share of stock, write a 1-year call on the stock with strike price of $90,
and buy a 1-year put option with the same strike. The cost of this three-instrument
portfolio is $86.53. The stock ...
0
votes
0
answers
25
views
Why does S&P 500 have a P/E Multiple of ca. 25 while other indexes (for ex. DAX) around 16?
I was thinking about a topic for my bachelor´s thesis and came across an interesting thing: P/E and other multiples of S&P500 were higher than those of other markets. Is there any research on this ...
1
vote
1
answer
126
views
Why is the portfolio weight of the risk-free asset capped at 1?
I am reading Investment Science by David Luenberger, and in it he creates a portfolio with a risk-free asset and a risky asset. α is the weight of the risk-free asset, and he sets α ≤ 1. Why is that?
...
- 11
0
votes
1
answer
52
views
Finding the market portfolio in a two-asset market under CAPM
I'm working on an unassessed course problem,
Consider a market with risk-free return $5\%$ and two risky investment $A$ and $B$. We are given the following data: \begin{matrix}
\text{Investment} &...
- 101
0
votes
0
answers
53
views
Is there a type financial instrument that can realistically increase its value 100 fold
Is there a type of financial instrument with extreme volatility, which could realistically grow in value by 10 000% over less than a year? If there isn't one that's commonly traded, could I craft one ...
- 101
1
vote
1
answer
853
views
Price discrepancy between the same company's stock on two exchanges
The graph shows a company's stock prices on two exchanges: New York Stock Exchange (NYSE) and Oslo Stock Exchange (OSE). Since these prices are denominated in different currencies, the NYSE price is ...
- 2,611
2
votes
1
answer
83
views
Does the near-zero value of Fannie and Freddie shares indicate the validity of the Discount Dividend Model?
The Discount Dividend Model posits that the value of equities is equal to the discounted value of future dividend payments of a firm; for a firm that doesn't pay a dividend, you presume that they are ...
3
votes
1
answer
93
views
When could value functions in Bellman equations be calculated explicitly?
Given the simplest form of a Lucas model, i.e., a Bellman equation given by
\begin{align}
J(x_t) & = \max_{c_t, x_{t+1}} \{ u(c_t) + \beta E_{\pi} [ J(x_{t+1})] \} \\
& \textrm{ s.t. } ...
- 31
2
votes
0
answers
59
views
Habit formation ala Constantinides (1990)
Consider the following problem, from Constantinides (1990).
\begin{align}
V(W_0, x_0) \equiv \max_{c, \alpha} \mathrm{E}_0 \int_0^\infty e^{-\rho s}\gamma^{-1}[c(s) - x(s)]^\gamma \mathrm{d}s,
\end{...
1
vote
0
answers
34
views
Testing asset pricing models with Roll's critique in mind
Roll's critique (Roll, 1977) can be summarized as follows (quoting Wikipedia):
Mean-variance tautology: Any mean-variance efficient portfolio $R_{p}$ satisfies the CAPM equation exactly:
$$
E(R_{i})-...
- 2,611
1
vote
0
answers
15
views
How should assets be valued when there is some private info & informative prices?
Valuation with noisy data and informative prices
Suppose everyone in the market for a particular asset has access to some very noisy information from which they can calculate the value of that asset. ...
- 369
1
vote
1
answer
40
views
Asset pricing models with CBDCs
What do you think about the adaptation of asset pricing models to CBDCs?
I can read some studies on asset pricing models with cryptocurrencies. But I cannot find anything about the asset pricing model ...
- 192
2
votes
0
answers
55
views
Complete markets and convenience yields
I have been reading some papers on the safety/liquidity of US government debt and got a bit perplexed by the assumptions made in some of those papers. For example, this paper by Mehrotra and Sergeyev ...
2
votes
1
answer
31
views
[Hull]: Put Lower bound example confusing
I have the 9th edition of hull and reading up on options.
Put options. I am reading Chapter 11 on page 240, section,on Lower
Bound for European Puts on Non-Dividend-Paying Stocks.
I'm confused by the ...
- 21
2
votes
2
answers
108
views
Deriving the constant relative risk aversion utility function
Here is the question I am trying to tackle:
Suppose that we are given a utility function $u$ with relative risk aversion $R_u$. Show that $R_u$ is constant and equal to $\rho$ iff there exist $\zeta\...
1
vote
1
answer
40
views
Stocks and call option
I've been asked this question by my professor, but I'm not sure about the answer:
"A broker proposes you two type of investment: the first is buying 100 shares of the company X at the current ...
- 11
2
votes
1
answer
73
views
Budget-feasible set in a portfolio choice problem
I am going through Duffie's Dynamic Asset Pricing book, and already ran into something that confused me on the third page. First, some definitions.
Let $\{1, \cdots, S\}$ be a finite set of states, $D$...
0
votes
1
answer
52
views
In the context of Blanchard and Watson (1982), what is the difference between the bubble component, bubbles and bubble?
Why are they consistently switching between plural and singular
and also, what is the difference between these and the bubble component?
A serious question. Below is the paper by Blanchard and Watson (...
- 167
4
votes
2
answers
1k
views
expected rate of return vs required rate of return in asset pricing
From Wikipedia, I read that "expected rate of returns" have two different meanings:
1: The expected return (or expected gain) on a financial investment is the expected value of its return (...
- 97
1
vote
0
answers
436
views
Relation between capm and efficient market hypothesis
I am coming from a machine learning/time series forecasting background and are currently studying Asset Pricing.
I have a good understanding of what Markowitz Mean-Variance Optimization (MVO) does, ...
- 97
1
vote
0
answers
83
views
Understanding how to estimate the model of Fung and Hsieh (2001) for the hedge funds risk factors
There is an old paper about the risk of hedge fund strategies that it gathers its focus in the trend followers. This is the Fung and Hsieh (2001) paper.
$\textbf{Definition of Trend Followers (TFs):}$ ...
- 440
2
votes
0
answers
63
views
Is there any known algorithm to negotiate a price between co-owners who want to sell an item? [closed]
I am looking for an algorithm or a mechanism that I could implement for a specific case in my smart contract. How can multiple co-owners of an item agree efficiently on a selling price?
I am not ...
- 21
1
vote
1
answer
149
views
Risk-free borrowing as an assumption for CAPM
In a presentation of CAPM, I have found an assumption that actors can borrow risk-free. If the borrowed money is to be used for investing in shares (which is a risky investment), it makes little sense ...
- 2,611
1
vote
1
answer
68
views
Should asset prices be always normalized by M2
When economists look at the financial asset prices, do they adjust them by something like M2 in order to judge how valued something is compared to the previous historic periods? It seems like ...
- 73
2
votes
1
answer
126
views
Definition of "true price" of an asset and connection with efficient market
A paragraph from the article Asset Mispricing:
One of the central doctrines of modern financial theory is that the price of a security should equal the present value of its cash flows. Recently, ...
- 123
1
vote
0
answers
71
views
Can the Equity Premium Puzzle apply equally to bonds?
Mehra and Prescott (JME, 1985) use the consumption-based asset price model to express the expected spread of equity returns over, e.g., a risk-free Treasury bond, as
\begin{equation*}
\mathbb{E}...
- 11
1
vote
1
answer
75
views
Budget line for mean variance utility
Consider the mean-variance utility used in CAPM. The budget line when allocating a risk-free and a risky asset is the line connecting the $r_f$ and the risky asset.
Suppose that I have fixed amount ...
- 2,084
2
votes
1
answer
86
views
CAPM Cost of Capital
In the CAPM model, the beta can be used to calculate the return required by the market for a security (cost of equity). This cost of equity can also be considered as a minimum return for possible ...
- 21
0
votes
1
answer
155
views
If GOOG shares confer no voting rights, where do their value comes from?
I recently found out that the difference between GOOG and GOOGL shares is that GOOG shares do not have voting rights. Then I read that the leadership is not planning to pay dividends anytime soon (...
- 133
4
votes
1
answer
235
views
Nonseparable utility across states of nature: an intuitive example
I am new to nonseparable utility across states of nature as found in some macro-financial models (discussed in this YouTube video lecture by John Cochrane). I do not find the notion intuitive. Could ...
- 2,611
2
votes
1
answer
45
views
$E[F_T] = F_0$ implies $p = \frac{1-d}{u-d}$? or is implied by?
From Ch 12 in Hull's OFOD, we compute the risk-neutral probabilities for a futures contract:
Later in Ch 17, futures options are valued, and we have the same result:
In relation to Chapter 16 and 17,...
- 370
1
vote
1
answer
336
views
Arbitrage free implies complete market in general binomial model?
Edit: Can complete hold even if $d < u \le 1+R$ or $1+R \le d < u$ ?
In Tomas Björk's Arbitrage Theory in Continuous Time, there exists this proposition
It seems that to show that the model is ...
- 370
0
votes
0
answers
25
views
Has anyone developed a good methodology for high-frequency inflation nowcasting?
Let's say I want to know what happened to the value of the U.S. dollar between three minutes and two minutes back from ... NOW. I have given myself a two minute slack period for data collection and ...
- 369
0
votes
1
answer
42
views
Does bank loan support affect companies in negative way?
I'm new to the economics exchange environment. My question may seem amateurish, but I did not find a satisfactory result by doing the necessary literature search.
A question that has been on my mind ...
- 101
1
vote
0
answers
19
views
Black-Litterman Weights for Intersecting Asset Classes
I'm trying to implement Black-Litterman for an arbitrary selection of assets some of which might be subsets or intersect with others.
For example, one portfolio might be
US Equities (VTI)
A global ...
- 111
0
votes
1
answer
205
views
Derive the market demand function and market supply function
In the second page of this paper Gjerstad et al derive the market demand and the supply for assets using the data shown in Table 1.
The table is
The demand function they find is $Q = 94 – 0.4 P$ and ...
- 77
3
votes
0
answers
67
views
Some basic Consumption CAPM questions
Say we are in a world described by the consumption CAPM. All investors in this world have quadratic utility. Also, assume that consumption is as follows:
$$c_{t+1} = (1+m_t)c_t + s_t c_t e_t $$
where ...
- 349
3
votes
1
answer
103
views
Replicate average risk-free rate in Wachter 2005, "Solving models with external habit"
I might be making a really simple mistake somewhere, but I thought I'd ask anyway. I'm trying to replicate the results in Wachter 2005, "Solving models with external habit". (You can also ...
- 9,385
1
vote
0
answers
16
views
Simple worked-out example of computing future cashflows of other countries' assets?
I read through a research note from Bridgewater and a lot of the discussion centered on finding attractive cashflows of global stocks in USD terms. Here is a line for ease of reference:
Across a ...
- 1,101
4
votes
1
answer
134
views
Why utility rather than expected utility in Cochrane's "Asset Pricing"?
Cochrane "Asset Pricing" Chapter 1 p. 6 says
We model investors by a utility function defined over current and future values of consumption,
$$
U(c_t,c_{t+1}) = u(c_t) + \beta \mathbb{E_t}[...
- 2,611
0
votes
4
answers
103
views
Why do people think a stock should have a certain price based on the company's revenue?
Stock investment comes part and parcel with discussions about quarterly earnings, P/E ratios, and a host of other considerations designed to measure the "intrinsic value" of a stock and ...
- 101
1
vote
0
answers
253
views
How is equilibrium reached in CAPM such that the tangency portfolio = market portfolio?
From my research online, when learning CAPM with $n$ risky assets and a risk free asset with return $r_f$, I always see the conclusion that in equilibrium, the market portfolio = tangency portfolio ...
- 111