Questions tagged [asset-pricing]
The branch of Finance that studies and models how specific assets (such as options, bonds and stocks) are priced.
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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 ...
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$E[F_T] = F_0$ 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,...
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33 views
Arbitrage free implies complete market in general binomial model?
In Tomas Björk's Arbitrage Theory in Continuous Time, there exists this proposition
It seems that to show that the model is complete, we must show that the claims are reachable, i.e. we must find ...
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18 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 ...
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1answer
40 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 ...
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29 views
How to interpret the Alpha in a multi-factor model?
For the CAP-M, the alpha can be interpreted as the excess returns of a benchmark index.
However, how should we interpret the alpha in a multi-factor model, like Carhart's 4-factor model? Does it still ...
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13 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 ...
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1answer
39 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 ...
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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 ...
3
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1answer
51 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 ...
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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 ...
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107 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,
$$
U(c_t,c_{t+1}) = u(c_t) + \beta \mathbb{E_t}[...
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Understanding the formulation for the SDF chosen in a paper
In a Stanford paper they claim the SDF is an affine transformation of the tangency portfolio by citing a textbook and then say a valid formulation of the SDF can be given by $M_{t+1} = 1 - \sum_{i=1}^...
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4answers
83 views
Why do people think a stock should have a certain price based on the company's revenue?
Stock investment comes part and parcel with discussions about quarterly earnings, P/E ratios, and a host of other considerations designed to measure the "intrinsic value" of a stock and ...
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How is equilibrium reached in CAPM such that the tangency portfolio = market portfolio?
From my research online, when learning CAPM with $n$ risky assets and a risk free asset with return $r_f$, I always see the conclusion that in equilibrium, the market portfolio = tangency portfolio ...
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To profit from rolling, mustn't you be much more bullish or bearish than before? [closed]
Aren't you likelier to lose money from rolling, e.g. scenarios 3-5 below? How exactly can rolling profit you?
What if you aren't more bullish or bearish than before? What if you surmise that the ...
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1answer
42 views
How is the cost of equity for a specific stock calculated using the Fama-French 5 factor model?
The Fama-French 5 factor model is as follows:
$$R_a = R_f + \beta_m \left( R_m - R_f\right) + \beta_s\text{SMB} + \beta_v\text{HML} + \beta_p\text{RMW} + + \beta_i\text{CMA}$$
It is quite easy to find ...
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How can successful small caps outperform large caps, when they become large caps?
For example, pretend that some S&P 600 corporation succeeds and profits, like some biotech discovers multiple cures to disease like cancer. Assume that its market capitalization then skyrockets ...
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2answers
122 views
What effect has the 30% increase in money supply from Feb-June of 2020 had?
I commented on a previous question that this is probably a better one. Old question
Generally speaking, how has the increase in money supply resulting from the CARES act stimulus package affected the ...
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1answer
23 views
Why might it make sense to buy bonds in a company facing restructuring?
In this video, Sal Khan states, "If you really thought that Lehman Brothers in the long term was going to come back, what you might want to do is somehow try to become one of its bondholders, and ...
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2answers
91 views
How does profit correlate with the duration of options?
To wit, do you profit more off options, the shorter-term they are like 0 DTEs? I know that option premium correlates negatively with duration.
Pre-suppose you think some biotech will discover a ...
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How can I represent this observation regarding options in a formula?
By observing how an option's expiration P/L changes as its underlying asset price changes, we can discover the following system of equations:
$\begin{cases}S_{Long} = C_{Long} + P_{Short} \\ S_{Short} ...
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Linearization around the steady state (Asset pricing application)
I am working through a linearization example from Colacito and Croce (2011). In the paper the following expression is derived:
\begin{align}
& (v^{i}_{c,t})^{\theta}=E_{t}[\delta e^{\Delta c^{i}_{...
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1answer
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Can an Out the Money put option's price $>$ its Strike Price?
I'd guess yes, if the put option's IV spikes. An OTM put has merely Time Value and no Intrinsic Value.
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1answer
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Can an In the Money Put Option's price $>$ its Strike Price?
The screenshot below suggests thatan ITM put option's price can't overstep its strike price? Why or why not?
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1answer
175 views
Are no arbitrage models and equilibrium models equivalent?
This YouTube video from WHU (starting from 3:50) claims that no-arbitrage models (such as Black-Scholes and HJM) are equivalent to equilibrium models (such as CAPM or C-CAPM).
He uses the Euler ...
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0answers
71 views
Cashflow Risk vs Discount Risk
I'm studying financial economics/asset pricing and I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (...
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2answers
56 views
CAPM and beta for individual stocks
Why do we just assume that the β is symmetric for a stock? Could it not very well be the case that the β has a larger leverage (covariance with the market) for example 1.2 in a bear (baisse) market ...
2
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1answer
24 views
Does anybody knows where I should look for a proxy for consumption to estimate a two factor C-CAPM?
Has anybody seen, any textbook recommendation that refers to the proper proxy for consumption. I am trying to estimate a two factor consumption CAPM, namely we I add a second factor apart from ...
0
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1answer
55 views
Can a position at a hedge fund be securitized?
Let's say that I'm an investor in a hedge fund, a recession just hit and I need cash asap. But the hedge fund either has infrequent redemption, or it locks my fund in, until the market gets better and ...
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1answer
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Capital/Income Ratio in Pikketty's Capital
In Capital by Thomas Pikketty, https://www.robertdkirkby.com/blog/2015/summary-of-piketty-i/, he states that World War I and World War II were the main reasons why the Capital Income to Labour Income ...
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What are the differences between hedging with swaps, options or futures?
For instance if a bank wants to hedge against interest rate risk, it could use interest rate swaps, or options or futures contract. Or in any other example, when a manager is hedging against risks.
...
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1answer
672 views
How does a perpetual futures contract affects the price of the underlying?
As long as I understand, a futures contract is kind of a prediction for the underlying's price at the time when it expires. But what happens if this futures contract is perpetual, and doesn't have a ...
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2answers
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If a call may expire OTM, why won't a \$1 increase in the underlying's price necessarily increase the call's price by \$1?
Zvi Bodie, Alex Kane, Alan J. Marcus. Investments (2018 11 edn). p 723 scanned.
Figure 21.9 verifies that the slope of the call option valuation function is less than 1.0,
...
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1answer
230 views
Calculating present value using Euler's number
So I was reading here where they calculate the expected value of an option at present given the expected value of the option in a year by calculating
$$C_0 = C_1 e^{(-r)}$$
where r is the interest ...
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1answer
95 views
Is Investopedia wrong about a Collar's maximum loss and profit?
Are the last two paras. below correct? Shouldn't they be reversed?
Isn't your maximum profit when $P \le 77$? Then you can exercise your 77P, but the call holder can't exercise his 97C. Your profit $...
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1answer
31 views
Isn't Bull Put Spread's Maximum Loss = Spread Credit + Loss from sold call + Profit from bought call?
I don't grasp the blue difference below. If $P \ge 48$, isn't the investor's
Maximum loss = spread credit + $\color{red}{\text{Loss from his sold 44C}} - \color{limegreen}{\text{profit from his ...
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1answer
44 views
Does deflation mean drop in asset prices?
Usually when inflation rises the stock market rises with it. The second point i want bring your attention to before i ask my question is when there are stimulus measure enacted by the government, ...
0
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1answer
74 views
How's a levered hedge fund effectively selling a gigantic put option on its ability to finance its own positions?
I grasp the basics of a put option. John C. Hull. Options, Futures, and Other Derivatives (2017 10 edn). pp 8-9.
A put option gives the holder the right to sell the underlying asset by a certain ...
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Oughtn't option premiums increase by the same amount as strike prices?
Pls see this question's title. In the screenshot below, as the strike prices below increase by +1, oughtn't the option premiums increase by +1 too?
Why buy the \$104 put for \$13.71? The \$105 put ...
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1answer
292 views
Who invented these key notions in Finance?
We often give credit to the origins of academic achievements. The Black-Scholes equation or the Gibbons Ross Shanken (GRS) test etc.
What about
Net Present Value (NPV),
Internal Rate of Return (IRR),...
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Forecasting integrated variables in a macroeconomic setting
I am trying to measure the effects of restrictions on immigration to a specific country on both real estate rental indices and real estate property price indices during the next 3 to 5 years. As a ...
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1answer
86 views
He, Krishnamurthy (2013)
How do you derive equation (10) on page 740 from He, Krishnamurthy (2013 AER)?
They say that "Given the log objective function in equation (8), the risky asset household chooses $\alpha_t^h$ to solve ...
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What is the economic meaning of multiple internal rates of return?
Recall that the internal rate of return (IRR) is the discount rate such that the net present value (NPV) of a project is 0.
One interesting complexity of the internal rate of return (IRR) is that it ...
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1answer
594 views
At what rate can a multi-billionaire liquidate his assets without significantly affecting the stock price?
Let's consider three different billionaires: Jeff Bezos, Bill Gates and Warren Buffett. Now let's say the three of them (at different times) decided that they want to liquidate all their assets and ...
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1answer
957 views
Example of Law of One Price holds but No Arbitrage Fails
I have been told that no arbitrage is a stronger assumption than than the law of one price.
In particular, Law of One Price is equivalent to the existence of a stochastic discount factor, whereas no ...
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Is there a widely accepted definition of "asset [price] inflation"?
A bit of googling found some conflicting ones...
Capel and Houben (BIS)
Asset inflation occurs when the prices of financial assets are rising even though they are already above their intrinsic or ...
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1answer
422 views
What is the difference between conditional and unconditional risk premia?
This is an asset pricing question. What is the difference between conditional and unconditional risk premia? Here's the context:
The fact that carry trade strategies typically earn positive average ...
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1answer
42 views
Budget constraint in Radner Sequential Trade Equilibria
Suppose that $q$ is a k-tuple vector of prices for the k assets whose quantities are given by the k-tuple $\theta$. I have just read that in the Radner Sequential Trade Equilibrium (not sure if this ...
