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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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 ...
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[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 ...
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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\...
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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 ...
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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, $D$...
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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 (...
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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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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, ...
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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.
$\textbf{Definition of Trend Followers (TFs):}$ ...
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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 ...
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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 ...
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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
&...
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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 ...
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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 ...
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capital gain tax and lump-sum transfer payment Under the perfect market benchmark
Under the perfect market benchmark where I assume that there is no trade and agents are identical,
Can there be capital gain tax and lump-sum transfer payment?
or, there is no capital gain tax and ...
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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, ...
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Transform the constraints for both liquidity demanders and suppliers if I include any tax on risky asset?
I have a question related to Vayanos and Wang's article
I'm studying on this article for my course term project. I would like to some adjustment and changes on this article in order to improve it ...
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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}...
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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 ...
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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 ...
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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 (...
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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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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 ...
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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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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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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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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 ...
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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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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,
$$
U(c_t,c_{t+1}) = u(c_t) + \beta \mathbb{E_t}[...
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Why do people think a stock should have a certain price based on the company's revenue?
Stock investment comes part and parcel with discussions about quarterly earnings, P/E ratios, and a host of other considerations designed to measure the "intrinsic value" of a stock and ...
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How is equilibrium reached in CAPM such that the tangency portfolio = market portfolio?
From my research online, when learning CAPM with $n$ risky assets and a risk free asset with return $r_f$, I always see the conclusion that in equilibrium, the market portfolio = tangency portfolio ...
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To profit from rolling, mustn't you be much more bullish or bearish than before? [closed]
Aren't you likelier to lose money from rolling, e.g. scenarios 3-5 below? How exactly can rolling profit you?
What if you aren't more bullish or bearish than before? What if you surmise that the ...
user4020
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How is the cost of equity for a specific stock calculated using the Fama-French 5 factor model?
The Fama-French 5 factor model is as follows:
$$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 ...
user4020
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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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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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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 ...
user4020
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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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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.
user4020
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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?
user4020
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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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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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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 ...
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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 ...
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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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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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