Questions tagged [asset-pricing]

The branch of Finance that studies and models how specific assets (such as options, bonds and stocks) are priced.

Filter by
Sorted by
Tagged with
1
vote
1answer
242 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-...
3
votes
0answers
32 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 ...
3
votes
1answer
29 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 ...
1
vote
1answer
46 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. ...
1
vote
2answers
51 views

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 ...
1
vote
0answers
15 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 ...
0
votes
1answer
26 views

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 ...
2
votes
2answers
331 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. ...
3
votes
1answer
103 views

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}[...
1
vote
1answer
262 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 ...
0
votes
0answers
20 views

Understanding the formulation for the SDF chosen in a paper

In a Stanford paper they claim the SDF is an affine transformation of the tangency portfolio by citing a textbook and then say a valid formulation of the SDF can be given by $M_{t+1} = 1 - \sum_{i=1}^...
0
votes
4answers
78 views

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 ...
-1
votes
2answers
39 views

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 ...
0
votes
0answers
17 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 ...
1
vote
1answer
215 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 ...
1
vote
0answers
109 views

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 ...
0
votes
3answers
65 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 ...
0
votes
1answer
72 views

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 ...
0
votes
0answers
9 views

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, ...
0
votes
1answer
54 views

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 $...
2
votes
1answer
22 views

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 ...
0
votes
1answer
32 views

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 ...
11
votes
5answers
785 views

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 ...
0
votes
1answer
25 views

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.
0
votes
2answers
89 views

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 ...
-1
votes
1answer
88 views

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 ...
0
votes
2answers
93 views

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 ...
0
votes
0answers
15 views

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 ...
0
votes
1answer
23 views

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 ...
0
votes
0answers
38 views

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} ...
2
votes
0answers
33 views

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}_{...
1
vote
0answers
22 views

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 ...
4
votes
1answer
115 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 ...
1
vote
1answer
36 views

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?
1
vote
0answers
68 views

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 (...
7
votes
1answer
145 views

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 ...
0
votes
1answer
46 views

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 ...
1
vote
1answer
39 views

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 ...
6
votes
2answers
231 views

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) ...
1
vote
2answers
52 views

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, ...
3
votes
1answer
141 views

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 ...
0
votes
1answer
390 views

At what rate can a multi-billionaire liquidate his assets without significantly affecting the stock price?

Let's consider three different billionaires: Jeff Bezos, Bill Gates and Warren Buffett. Now let's say the three of them (at different times) decided that they want to liquidate all their assets and ...
1
vote
3answers
413 views

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 ...
4
votes
3answers
4k views

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 ...
0
votes
1answer
39 views

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, ...
0
votes
0answers
16 views

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 ...
3
votes
1answer
268 views

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),...
0
votes
0answers
34 views

Forecasting integrated variables in a macroeconomic setting

I am trying to measure the effects of restrictions on immigration to a specific country on both real estate rental indices and real estate property price indices during the next 3 to 5 years. As a ...
3
votes
1answer
82 views

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 ...