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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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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 ...
Wittgenstein's Poker's user avatar
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35 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 ...
Ignacio Canabal's user avatar
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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 ...
aedcv's user avatar
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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 &...
Medulla Oblongata's user avatar
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30 views

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 ...
s5s's user avatar
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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 ...
Daragh McQuaid's user avatar
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21 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 ...
Matsvei Voltau's user avatar
1 vote
1 answer
98 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? ...
wwjwjwjwj's user avatar
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33 views

Does the payoff in a future option contract include the price of the future contract?

This website has this diagram which shows the payoff as $0$ for $S_T\leq X$ or $S_T\geq X$ (depending on the position-option combination). But isn't the buyer/seller of the position down/up the ...
mjc's user avatar
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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} &...
mjc's user avatar
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Calculating the value of this asset

calculate the cash value of a financed asset that is paid in the following way: an initial payment of 500,000, in month 2 a payment equal to half its value, in month 7 a payment equal to a third of ...
VOZ ESTOICA's user avatar
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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 ...
Francis L.'s user avatar
1 vote
1 answer
204 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 ...
Richard Hardy's user avatar
2 votes
1 answer
71 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 ...
coMPUTER sCIENCE sTUDENT's user avatar
3 votes
1 answer
84 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. } ...
Eddie's user avatar
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What are the theoretical approaches to ambiguity?

I'm trying to understand the different approaches that economists took to investigate ambiguity. Two approaches particularly caught my eyes: the model by Klibanoff, Marinacci and Mukerji (2009), and ...
Eddie's user avatar
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Stochastic discount factor derivation

What are the intermediate steps to arrive at equation (4) in Lettau and Wachter 2007? Here is the paper: https://drive.google.com/file/d/1Bc0oOqKGm0otYbywf5gdfwzpRpA-D11p/view I am confused why there ...
liss559's user avatar
2 votes
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57 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{...
Wittgenstein's Poker's user avatar
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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})-...
Richard Hardy's user avatar
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13 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. ...
andrewH's user avatar
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1 answer
38 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 ...
studentp's user avatar
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2 votes
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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 ...
Wittgenstein's Poker's user avatar
2 votes
1 answer
29 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 ...
user43671's user avatar
2 votes
2 answers
92 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\...
Philip Hartfield's user avatar
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 ...
ar em's user avatar
  • 11
2 votes
1 answer
69 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, $D$...
Wittgenstein's Poker's user avatar
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1 answer
48 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 (...
EHMJ's user avatar
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4 votes
2 answers
900 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 (...
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405 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, ...
Enk9456's user avatar
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1 vote
0 answers
62 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. $\textbf{Definition of Trend Followers (TFs):}$ ...
Oliver Queen's user avatar
2 votes
0 answers
62 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 ...
Ayden's user avatar
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1 vote
1 answer
126 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 ...
Richard Hardy's user avatar
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0 answers
67 views

Options, Futures and other derivatives, book by Hull, confusion of currencies

I have a small technical problem with a book by Hull: on the page 7, the first line, in the 11th edition of his book Options, Futures and Other Derivatives (please see the snippet below) he writes &...
user2925716's user avatar
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0 answers
29 views

Cryptocurrency perpetual futures shorting mechanism

I am trying to understand shorts in a perpetual futures market. Let's consider a market of ETH/USDC, trading at 1000 USDC. When user A shorts 1 perp (assuming no leverage) they pay 1000 USDC, the ...
ad112's user avatar
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1 vote
1 answer
64 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 ...
spacemonkey's user avatar
2 votes
1 answer
118 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, ...
Sane's user avatar
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1 vote
0 answers
69 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}...
user41062's user avatar
1 vote
1 answer
69 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 ...
High GPA's user avatar
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2 votes
1 answer
75 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 ...
Max Rativ's user avatar
0 votes
1 answer
141 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 (...
Nic Szerman's user avatar
4 votes
1 answer
208 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 ...
Richard Hardy's user avatar
2 votes
1 answer
44 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,...
BCLC's user avatar
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1 vote
1 answer
271 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 ...
BCLC's user avatar
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0 answers
24 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 ...
andrewH's user avatar
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0 votes
1 answer
41 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 ...
Samet Sökel's user avatar
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 ...
jtanman's user avatar
  • 111
0 votes
1 answer
190 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 ...
fennel's user avatar
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3 votes
0 answers
63 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 ...
elbarto's user avatar
  • 349
3 votes
1 answer
91 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 ...
jmbejara's user avatar
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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 ...
Arash Howaida's user avatar