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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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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Predicting long term asset returns

I am currently trying to form an overall asset allocation strategy which combines base strategic allocation and tactical shifts. My model already incorporates the tactical shifts using various factors ...
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10 views

How to interpret the (expected) exposure and CVA of an option or a single share

I have a quick (hopefully simple) question regarding the interpretation of the expected exposure of a call option and a single share. I've done some computations on the formula for the expected ...
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1answer
22 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 ...
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3answers
50 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 ...
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1answer
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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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1answer
16 views

Ex-dividend (Asset Pricing)

I am reading some lecture notes on asset pricing, and they use the term "ex-dividend" price of an asset. I googled and found that ex-dividend means the time between announcement and payment of a ...
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156 views

A question about Lagrange multiplier(when $\lambda=0$)

I need help in a maximization problem(finding the optimal investment portfolio). where $R_s$ and $\Phi$ are $n$ by $1$, with other variables being scalars. $C^s$ is consumption (or wealth) of an ...
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1answer
114 views

Show that the dividend price ratio is a ARMA(p, q) process

Let the log dividend growth evolve according to $\Delta d_{t+1} = \epsilon_{d, t+1}$ where $\epsilon_{d, t+1}$ is just white noise. Let the log returns be $r_{t+1} = x_t + y_t + \epsilon_{r, t+1}$ ...
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37 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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1answer
56 views

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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2answers
102 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. ...
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1answer
74 views

implied volatility, how to get parameters?

I understand how to calculate volatility and how to calculate call or put price. However I don't understand something about input parameters. For an example. enter link description here At the ...
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36 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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1answer
9 views

How startup early valuation influence later funding stages?

Let's suppose that a startup raise his seed round with a 100k funding for 10% equity. The startup has a pre-money valuation of 1M. Let's say that the startup, after 1 year, raise a Series A round. ...
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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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1answer
43 views

One-step Binomial model's Radon-Nikodym derivative

In the one-step binomial model... For $\frac{d \mathbb Q}{d \mathbb P}$, 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 some asset with payoffs $\...
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55 views

asset-pricing problem

Consider the utility function $ν(c_1, c_2) = u(c_1) + \beta u(c_2)$, $0 < \beta < 1$, defined for $c_1 ≥0$ and $c2 ≥0$. Assume $ν′(c)>0$ and $ν′′(c)<0$ for all $c>0$ ; if you like, you ...
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4answers
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How should I evaluate my startup?(specific question)

If I have a startup that produces a product that I estimate to sell 100/per month, with 50%profit, and $200 is the customer price of each product, How can I evaluate this business to find investors?
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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 ...
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139 views

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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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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Asset pricing vs Empirical asset pricing

I get confused on what is the difference between asset pricing vs empirical asset pricing? Could you clarify your answer? Also, is asset pricing just assessing the current value of an asset? Thanks,
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Any major theory/model that considers return due to idiosyncratic risk?

Are there any classical, major theories/models that consider positive return due to idiosyncratic risk? For example, CAPM only considers return due to systemic risk but not idiosyncratic risk. If ...
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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
370 views

Proving that constant absolute risk aversion and relative risk aversion implies independence of initial wealth

I was able to prove that for a portfolio with one risk-free asset and one risky asset, if the Arrow-Pratt measure of absolute risk aversion is constant (i.e., constant absolute risk aversion, CARA), ...
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1answer
179 views

During an economic expansion, how do the ratios of Return on Equity and Return on Asset are affected?

From my perspective, during an economic expansion, industrial production, employment, personal incomes and sales are increased excluding the inflation rate. To be more specific, companies buy new ...
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3answers
53 views

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 ...
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1answer
185 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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300 views

Introductory book for asset pricing and financial economics

I am going to complete a continuous time finance course in the upcoming semester. Although all my higher education is in economics I have not encountered a financial economics setting of contingent ...
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1answer
121 views

Forward Guidance - What happens when the FED unloads its balance sheet

Please Excuse my ignorance. The US Federal Reserve has issued forward guidance telling the world that it is going to start to sell its (well a little less) 4.5 trillion dollars worth of securities ...
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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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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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1answer
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Econometrics for currency valuation?

Different assets have different motivations and components for price determination. For example, an equity stock price might be considered to be include the value of underlying company, its potential ...
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1answer
167 views

Optimal pricing for Crypto-Currency Exchanges

I have a general understanding of game theory, and want to try to apply it to crypto-currency exchanges, which are completely decentralised systems. I come from a finance background so I will define ...
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2answers
60 views

intuition about option values

What is the relationship of the option value and the pay off to an option? What happens if the option value > pay off? or if it is equal to the pay off? I read that in a put option , the option value ...
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1answer
62 views

expected payoff of an American put option

I am reading about the American option and sources got me confused in the part where the American put option is considered on a non-dividend paying asset. I understand that the payoff of an American ...
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1answer
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Collar strategy for options trading [closed]

I am new to investing on the market so I am doing some research and studying. From what I can tell, the purpose of a collar strategy for options trading is to protect your gains you've made on the ...
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1answer
135 views

How does a liquidity guarantee for Asset-Backed Commercial Paper used to finance a Conduit work ?

A liquidity guarantee was what a lot of banks used to insure outside investors payments if an asset in a Conduit defaulted. The way they were doing it was not really dispersing the risk evenly ...
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Deriving and using the pricing equation

I'm a mathematician who's trying to learn some economics from Cochrane's Asset Pricing book. I don't have any background in economics. In chapter 1, he derives the basic pricing equation $$ p_t = \...
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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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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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Capital Asset Pricing Model Variation [closed]

Usually for CAPM we have: $$E(R_i)-\gamma=\frac{cov(R_i,R_m)}{var(R_m)}\times E(R_m-\gamma)$$ We know that $$\beta=\frac{cov(R_i,R_m)}{var(R_m)}$$ When can we replace $\beta$ with $\left(\frac{E(...
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124 views

Terminal Condition for American Put Option

In a recent book I read the author mentioned the terminal condition: $$\mathop {\lim }\limits_{t \to T} V(S,t) = \max \left\{ {X - S,0} \right\}$$ This is intuitive to understand. Then, the ...
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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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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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201 views

Asset pricing Coursera resources

I am trying to learn John Cochrane's Asset Pricing. I notice there are Coursera resources (link). However, it is not available now. Did anyone try that class before? Does anyone know what's the next ...
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561 views

Ito's Lemma derivation

I'm getting into asset pricing and was looking at Ito's Lemma, but cannot understand a few steps that are given. Ito's Lemma states that given $$dx_t = \mu dt + \sigma dz_t \\ y_t = f(t, x_t)$$ ...
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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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1answer
86 views

Can anyone help me understand the budget constraint of an investor in complete market?

In the problem below, u is a utility function; $\beta$ is a discount factor; pc(s) is the price for a contingent claim for state s. c is initial consumption and and y is initial wealth. s represents a ...