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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3
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2answers
119 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 ...
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1answer
37 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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1answer
110 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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2answers
313 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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1answer
1k views

Apply Ito's Lemma to exponential martingale

$\newcommand{\dd}{\, \mathrm{d}}$ Consider the exponential martingale, $$ \xi_t^\lambda = \exp \left\{ - \int_0^t \lambda_s \dd z_s - \frac 12 \int_0^T \lambda_s^2 \dd s \right\}, $$ that is used in ...
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1answer
18 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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3answers
301 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
128 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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1answer
207 views

Stock pricing with cross ownership

Cross-ownership is a phenomenon where companies own parts of other companies they do business with. An example: Two companies are now involved in the diamond operation, the mining group Anglo-...
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0answers
43 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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0answers
48 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
17 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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27 views

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
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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2answers
60 views

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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4answers
92 views

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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456 views

Log-normality assumption in consumption based asset pricing

Consider a very basic discrete time representative consumer maximization problem with CRRA utility. There exist a risky asset with time $t$ price $p_t$ that pays time $t+1$ dividend $d_{t+1}$ , and a ...
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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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1answer
2k views

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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2answers
98 views

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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0answers
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
509 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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3answers
670 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
187 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
55 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
125 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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99 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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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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2answers
99 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
275 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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1answer
102 views

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
176 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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1answer
98 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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2answers
263 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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1answer
53 views

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
212 views

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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0answers
149 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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6answers
742 views

What metrics would indicate a house bubble rather than genuine market values?

There are concerns that Auckland, New Zealand, is currently experiencing a housing bubble. Auckland is one of the top 10 cities in the world on a housing unaffordability index. The question is - ...
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1answer
93 views

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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2answers
765 views

Examples of Factors in the ICAPM

The intertemporal capital asset pricing model (ICAPM) is different from the CAPM in that in the ICAPM, utility is conditioned on some set of state variables. The ICAPM results in a multifactor pricing ...
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1answer
96 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 ...
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0answers
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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2answers
774 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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0answers
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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0answers
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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2answers
273 views

Difference between objective and subjective distributions in asset pricing models?

How does one differentiate between "objective" and "subjective" probability distributions in asset pricing models? In asset pricing, economists often make a distinction between the "subjective" and ...
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1answer
2k views

Under what condition would the law of one price hold?

Under the consumption-based model for asset pricing, different people will have different prices because of their different utility functions. What is the force that make the law of one price hold? ...
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0answers
575 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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2answers
2k views

Financial Economics Textbooks

I have an interest in financial economics, and I plan to take the graduate sequence, however I did not take an undergraduate course in that field. I would really appreciate it if someone could ...
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55 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 = \...