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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Policy rate and the mean of the stochastic discount factor: what is exogenous?

Let us fix the length of one period to be the tenor of the risk-free rate targeted by the central bank, e.g. 1 day. There exists a stochastic discount factor (SDF, a.k.a. pricing kernel). I am ...
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54 views

Gaussian Affine Model and CAPM

When I assume an one-factor Gaussian term structure model such as the Vasicek model $dr_t = \kappa(\mu - r_t)dt + \sigma dW_t$ and specify a constant market price of risk of $dW$ to be $\lambda_t = \...
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196 views

Fundamental Theorem of Asset Pricing (Linear Algebra)

I saw this question in a textbook that I was recently reading and don't really know how to aprpoach this problem. Let $H$ be a finite dimensional vector space with inner product ($\cdotp$, $\cdotp$)....
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Competitive Equilibrium in Securities Market: First Welfare Theorem

I'm working through Kerry Back's "Asset Pricing and Portfolio Choice Theory" book. Trying to work through the proof of the First Welfare Theorem in the context of securities markets on page 58. Back ...
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31 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}_{...
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44 views

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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23 views

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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566 views

What is the intuition behind projecting stochastic discount factor into the vector space spanned by the payoff vectors?

It makes sense to stochastic discount factor as a function of impatience and marginal utility of consumption, but what is the rationale to project it into the vector space spanned by the payoff ...
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161 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 ...
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54 views

Capital asset pricing model (CAPM) applied to countries

I'm struggling on trying to find a beta for an equially wighted profolio for three countries (A, B,C). All the data I'm given are montlhy retunrs of each countrys ...
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284 views

Calculating the optimal portfolio for an investor with quadratic utility

The problem is from Asset Pricing and Portfolio Theory by Back and can be found here. The relevant info from section 2.5 can be found here. Given that we have the Expected value and the variance of ...
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58 views

ICAPM when assets' mean returns and variance-covariance matrix are not constant over time

The intertemporal capital asset pricing model (ICAPM), under the usual assumptions, produces a multifactor pricing model like the one described in this question. When and how would it be possible to ...
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38 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 ...
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67 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 (...
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1answer
151 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 ...
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42 views

Terminal and annual surplus distribution in participating life insurance

I consider a participating life insurance contract which is fair if $P_0 = e^{-rT} \mathbb{E}^{\mathbb{Q}}\left[ L(T) \right)$ ($\mathbb{Q}$ denotes the risk-neutral measure), where $P_0$ is the ...
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45 views

Consumption based asset pricing book with Epstein-Zin(-Weil)

Any advice for a book covering consumption based asset pricing in general and in particular also covers non-standard asset pricing models / utility functions such as Epstein-Zin(-Weil)? Besides the ...
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26 views

Approximate factor model: Weakly correlated and eigenvalue

To my best knowledge, in Ross's APT, it is assumed that the pricing model is the exact factor model. Chamberlain (1983 ECTA) expanded it into the approximate factor model. In the exact factor ...
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69 views

Monthly savings plans

Monthly savings plans in stocks or funds are typical investments for many people. On aggregate, these plans generate a large demand on the underlying assets, often around the end/beginning of a month. ...
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1answer
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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18 views

expected pay off of an American option

I find it hard to get an intuitive understanding of the expected pay off of an American option. I read in this thread expected payoff of an American put option but what I don't understand is why do ...
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138 views

Dataset - Fama French Replication

I am trying to replicate the Fama-French three-factor model. I am having issues in the dataset. 1) Using the CRSP/COMPUSTAT merged dataset for firm fundamentals from WRDS, and then dropping data on ...
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96 views

Metric for evaluating sales with dynamic pricing

Suppose you have a sausage maker. He buys batches of ground meat, then makes and sells sausages. Suppose each batch of ground meat makes N sausages, and each batch has specific level of quality that ...
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30 views

How to dynamically update/calculate the price if we have the following values?

Need to update/calculate the price, the given values are: Reserve (Stock) (higher the price can be lower) Cost (the higher, the price can be higher) Sales Speed (the higher, the price can be higher) ...
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58 views

Consumer based asset pricing model, differentiation problem

Just a small question about the differentiation technique used in the consumer based asset pricing model. I need to maximize the following equation: $U(c_t) + E_t[\beta \cdot u(c_{t+1})]$ $$\begin{...
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68 views

Bonds with embedded options pricing via binomial model

Notation: t - time; G(t) - zero-coupon yield curve; $r$, $r_d$, $r_u$ - interest rates. The task is to find market price of a bond for today, while knowing the price of a number of other bonds. ...
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39 views

Risk factors and diversification in asset pricing models

Consider a factor model like Fama and French (1993). Total risk has two components, systematic risk and idiosyncratic risk. Idiosyncratic risk can be diversified while systematic risk cannot. ...
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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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6 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, ...
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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 ...
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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} ...
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1answer
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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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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 ...
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1answer
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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1answer
21 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 ...
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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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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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How much of an assets price change is due to speculators and functional buys/sellers

If (for example) a heavily traded asset like crude oil has a price move of x, how much of that is influenced by functional buyers/sellers and how much by speculators? Let's say x is +100, there are 8 ...