# 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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### Calculate dividend yield using cumulative dividend and price

I just learned basic theory of option pricing and I'm doing some exercise. There is a problem about dividend yield. Suppose we are given cross-sectional data like this: where $S$ is the price of ...
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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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### CAPM and beta for individual stocks

Why do we just assume that the beta is constant for a stock? Could it not very well be the case that the beta is 1.2 in a bear (baisse) market and 0.8 in a bull (hausse) market for an individual stock,...
219 views

### International Capital Asset Pricing Model (CAPM)

I wanted to value a High-tech start-up of which I have the cash flows of the coming 6 years. I decided to use the Discounted Cash Flow Method. To do so, I calculated the Discount rate. For a High-...
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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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### Why do high earning multiples imply a likelihood of low or even negative returns?

I quote Burton Malkiel in his May 4 2020 dialogue with Robert Shiller. Some historical perspective is useful. Even during one of the most spectacular “bubbles” in stock market history (the dot.com ...
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### One-step Binomial model's Radon-Nikodym derivative

In the one-step binomial model... Question 1: What exactly is a '$\frac{d \mathbb Q}{d \mathbb P}$'? I think it's $\frac{d \mathbb Q}{d \mathbb P} = \frac{q_u}{p_u}1_u + \frac{q_d}{p_d}1_d$, so it's ...
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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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### 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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### 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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### 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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### Does the Lucas (1978) asset pricing model feature complete markets?

The Lucas (1978) asset pricing model seems to be one of the workhorse models in finance / asset pricing models. It also seems to be the case that the environment, with claims to $n$ (exogenous) ...
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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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### 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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### Did (or can) quantitative easing cause an “everything bubble”?

Wolfstreet claims that It’s true that despite QE globally – not just in Japan – there has been relatively little consumer price inflation in the countries whose central banks perpetrated it. But it ...
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### Why are asset pricing models equilibrium models?

I have several times heard scholars refer to asset pricing models (such as the CAPM) as a type of equilibrium model. Why exactly is this the case? Does this simply mean that equilibrium is a necessary ...
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### 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, ...
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### 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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### 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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### How does the Fama and French 3-factor model explain stock covariance?

Does it at all? If so, how? It is understood that size and value play a role in determining returns and there are proposed explanation those these, but what about covariance?
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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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### Independent sort: Fama-French 2015

While replicating the FF-2015 Size-BE/ME-OP 32 test portfolios I notice missing values in the combination Big,BE/ME 4th quartile, OP 4th quartile. I am a bit puzzled, FF say they independently sort ...
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### Markets that are linked to options prices

I recently went through a serious of lectures on economics and markets, and I was surprised by the lectures on options. The lecturer, said that the future prices of certain commodities like rice (food)...
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### Inflation , Housing Prices, Is there some form of the CPI that can include Home Prices?

I understand why we don't include real estate in the CPI. It makes sense, when it is explained to me. I also understand Rent is included in the CPI. However? I live in Canada . Our Populations ...
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### 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 ...
Is there a difference between continuation value ($V_t$) and utility ($U_t$) except for a possible scaling / difference in units? My question refers to the consumption-based asset pricing literature. ...