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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23 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 ...
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1 answer
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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 ...
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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 ...
2 votes
1 answer
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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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1 answer
70 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? ...
2 votes
1 answer
62 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 ...
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1 answer
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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 ...
1 vote
1 answer
58 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 ...
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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} &...
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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 ...
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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})-...
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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 ...
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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 ...
1 vote
1 answer
103 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 ...
3 votes
1 answer
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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. } ...
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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 ...
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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 ...
2 votes
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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
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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. ...
1 vote
1 answer
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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 ...
1 vote
1 answer
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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 ...
2 votes
2 answers
88 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\...
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 ...
2 votes
1 answer
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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 ...
1 vote
2 answers
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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?
3 votes
1 answer
240 views

Black-Scholes - Theta formula Futureoption Currencyoption

I cannot figure out how the theta-formula would look like for a future option and a currency option. I know the formula and understand it for an ordinary stockoption - but not for future-option and ...
2 votes
1 answer
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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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1 answer
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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 (...
1 vote
1 answer
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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 ...
4 votes
2 answers
581 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 (...
1 vote
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373 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, ...
1 vote
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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. $\textbf{Definition of Trend Followers (TFs):}$ ...
1 vote
1 answer
252 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 ...
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4 answers
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Does an instant settlement system (such as blockchains) eliminate the possibility for short selling?

My understanding is that a short sell is possible because you can sell positions you don't have and then buy at a later point to cover your position (with the price hopefully being more favorable) to ...
3 votes
2 answers
473 views

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?
2 votes
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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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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 &...
4 votes
1 answer
292 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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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 ...
2 votes
1 answer
110 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, ...
1 vote
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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}...
1 vote
1 answer
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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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1 answer
135 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 (...
2 votes
1 answer
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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,...
4 votes
1 answer
955 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 ...
1 vote
1 answer
58 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 ...
3 votes
3 answers
206 views

Why do housing and parking cost more in urban than in rural areas, but road access doesn't?

In city centres, land is more expensive than in suburban or rural areas, as land is scarce. Consequentially, housing and parking in cities cost more. However, the same is not true for using the road ...
4 votes
1 answer
190 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 ...
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1 answer
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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 ...
5 votes
1 answer
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What exactly is/How exactly do we interpret the binomial model's Radon-Nikodym derivative?

Related: Lewis' triviality result? As I recall the one-step binomial model goes like this: The time periods are now $t=0$ and later $t=1$. We have 2.1. a stock that pays off $u$ for going up or $d$...