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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16 views

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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33 views

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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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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38 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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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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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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61 views

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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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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log-linearize a forward looking variable (P/D) with recursive expression

I can solve the model in dynare but I need your help with the following problem: How does one derive a log-linearized expression for a forward-looking variable around the steady-state? For example, ...
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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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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,...
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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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How does low volume explain why ITM call's ask price < its strike price + option premium?

On Jul 28 2020, u/OGdungeonmaster asked: I have 10 $7.50c options for Euronav [[EURN:NYSE](https://finance.yahoo.com/quote/EURN?p=EURN&.tsrc=fin-srch)] that expire 11/20. They show they are ...
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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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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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Are options a form of insurance?

In my economics classes we have studied some really rudimentary concepts about insurance. I'm not really sure what qualifies as insurance to be honest. I was wondering if options are considered a ...
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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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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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Why did VelocityShares Daily 3x Inverse Natural Gas ETN skyrocket from 900 to 25,000 in 2 days? [closed]

Why Did DGAZF Go From \$400 To \$24,000 In Just A Few Days? DGAZF is the over-the-counter version of the now delisted VelocityShares Daily 3x Inverse Natural Gas ETN (DGAZ). Back in June, I wrote ...
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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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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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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 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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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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101 views

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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How can I calculate returns for each three investment strategies?

Assume that the price of DF stock went from a price of $104 on March 2 to 146 on April 1. With a current stock price of 146, there is a call option available on the DF stock with an exercise price ...
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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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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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640 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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Historical sovereign bond yield and CDS rate data download

Does anyone know where I can download from: 1) historical data for sovereign bond yields (or prices) and 2) historical data for soveregin CDS (credit default swaps) rates? preferebly free?
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245 views

Continuation value versus utility in asset pricing

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. ...