Questions tagged [finance]

Finance describes the management, creation and study of money, banking, credit, investments, assets and liabilities that make up financial systems, as well as the study of those financial instruments.

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How do I use the Malliavin calculus to solve for the optimal trading strategy in the classic Merton problem?

How do I use the Malliavin calculus to solve for the optimal trading strategy in the classic Merton problem? In Duffie's book "Dynamic Asset Pricing," he outlines the "Martingale method" of solving ...
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57 views

Futures Market Books

Are there any recommendation for futures market or commodity trading books? I am not interested in trading myself, but would like to have a better understanding of it for my research.
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Fixes of quadratic utility when probability of decreasing utility is large

In finance and specifically portfolio theory, a popular utility function is quadratic utility $$ u(x)=x-\frac{\lambda}{2}(x-\mu_x)^2 $$ where $x$ is wealth and $\lambda$ is the parameter of risk ...
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Have there been any structural changes in the market that would lead the indexes to be trading so high?

If you look at this graph of the SnP500: You will see that it is trading at levels higher than pre 08 or 99. What systemic structural changes in the market have led it to be trading so high? I think ...
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1answer
117 views

Why are people rich?

Different people become rich for different reasons, such as: Developing/selling a great product Investing Winning the lottery Inheriting family money Some of these seem more fair than others, which ...
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43 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 ...
2
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1answer
41 views

Data analysis with GARCH modeling

I'm currently analyzing the relationship between stock, bonds, and real estate returns in Germany. I've gathered my data and am planning on estimating this equation: $\sigma_t = \beta_0 + \beta_1 R_{...
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22 views

Since the financial crisis, what measures have been taken to solve the too-big-to-fail problem?

Ben Bernanke (2010): If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved. So, what measures have been taken to solve the too-big-to-fail problem? To what ...
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Showing that a market model has arbitrage and describing martingales

This is an exercise which I came upon while studying an introduction to financial mathematics. Exercise : Consider the finite sample space $\Omega = \{\omega_1,\omega_2,\omega_3\}$ and let $\...
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24 views

Are there any experiments about financial games with just one player?

I was wondering if there are any experiments of financial games (laboratory games under controlled circumstances like Plott and Sunder's Rational Expectations and the Aggregation of Diverse ...
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17 views

What drives the Idiosyncratic Volatility puzzle?

I am currently analyzing the IVOL puzzle and I find in a single sort that the higher the IVOL the lower the return. Additionally I do a double sort, first sorting on skew and then on IVOL. I find that ...
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207 views

Why should UIP hold?

I am aware of the details of Uncovered Interest Parity, namely that the expected depreciation of a currency vs another one should equal the interest rate differential. I am also aware that empirically ...
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58 views

Total market cap in country, and average p/e per country and continent(europe)

sorry I am not sure to post this question in quant stackexchange or in here. I have posted it previously in the below link https://quant.stackexchange.com/questions/18633/total-market-cap-in-country-...
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159 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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107 views

What can we conclude from the overdetermined equity premium puzzle?

The equity premium: A puzzle (Mehra and Prescott (1985)) lays out the basic problem with equity returns: Restrictions that a class of general equilibrium models place upon the average returns of ...
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49 views

How can I construct a process for cumulative returns that is riskless?

This question is a little more specific than the title. Here I use the same notation that is set forth in this other question about cumulative returns (the sum of return observations). That is, let $...
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54 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 ...
2
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1answer
120 views

Measuring demand for banking services - (Maximum) Market Size

I am in need of a variable measuring "demand for banking services" in general, on a country level. Specifically the (maximum) size of the market for banking services for a given country. This will be ...
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14 views

Somers’D and Gini coefficient: differences

I would like to know what are the differences between somers’d value and the Gini coefficient. I have the following values for factors: ...
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1answer
34 views

Why does Samuelson say common stocks are better than bonds and preferred stocks during inflation?

I’m reading the first edition of Paul Samuelson’s Economics (1948). In Chapter 6, “Business Organization and Income,” after describing bonds, preferred stocks, and common stocks, he writes: To test ...
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15 views

How to calculate bond price and the relationship between bond price and repo rate?

Suppose that there is a gilt Tr 7.5pc '06 in 2006 with interest yield 7,32% and redemption yield 4.31%. How can I compute the price of this gilt per 100 face value. The problem is that the numbers I ...
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15 views

GARCH data modeling

I am analyzing three time series returns for stocks, bonds and real estate, and have done prelimanary tests including Engle's ARCH test which came back as not rejecting the null hypothesis. IF there ...
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1answer
78 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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57 views

Yang's Impact on Algorithmic Trading?

Presidential candidate Andrew Yang has published the following policy proposals on his website: 1. FINANCIAL TRANSACTION TAX Financial markets have grown dramatically over the past decades. ...
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25 views

Assessing the ability of dividend yields to predict stock returns using out-of-sample forecast errors

In Introduction to Econometrics, 3rd Edition, by Stock and Watson, there is a short example about evaluating the ability of using dividend yields (current dividends over price) to predict future stock ...
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Is rent on a relocation — an example of unfunded liability?

I'm not too sure if the question makes much sense, but let's assume that you get a job offer in SF, and in order to accept, you basically have to sign a 6- or 12-month contract for rent in order to be ...
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37 views

Can a government invest in public companies so their dividends can finance the government

Is it possible that a country could use the money in its sovereign wealth fund to invest in different country's Stock Market and use the dividends to finance its government thus increasing spending ...
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17 views

primary impact on real estate prices/taxes

Are my housing prices/taxes more influenced by the $40M beach house a few miles away from my home or those in the lower-class well beyond my county line? Assuming a few basics: there are differing ...
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24 views

Use of Normal distribution in financial simulations

In paper such as this, I see the normal distribution being used to model the process of a financial investment. This seems strange because aggregating i.i.d. normal variables yields a mean that ...
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118 views

J Curve and DD Schedule in the Short Run (International Finance)

Assume that the J-curve is true. What would the DD curve look like during the early period of the J-curve (where the value effect dominates)? What would the effect of temporary changes in monetary ...
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Graph of liquidation of trade versus price of commodity

Suppose I want to open a long position (that which increases in value as the commodity goes up in value) in some commodity whose price at the time of opening the trade is, say, $p$. The position is ...
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60 views

Why are share repurchases particularly accretive?

From the "Manual of Ideas"... VALUE CREATION VIA BUYBACKS Share repurchases tend to be particularly accretive in the case of companies generating cash from operations while trading below tangible ...
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25 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
208 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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29 views

Basis about money

How RBI prints money on what bases? other than changing old money to new money. If price increases and tax increases on what bases they will print more money. Please explain in simple words
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92 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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63 views

Confusion about Balance sheet equation and sum of the cashflows

I was solving a business case I had at school where i just needed to compute the cashflows (CF). Once I have done so I wanted to check that my calculations are all good by verifying that the following ...
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34 views

One trivia on Miller Modigliani Theorem regarding the No arbitrage Argument

Suppose there are a levered firm with firm value $V_L=D_L+E_L$ and an unlevered firm $V_U = E_U$ both yielding an income of $X$ at time 1. One direction of the no arbitrage argument goes like this: ...
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134 views

How to solve a variation of Merton's optimal portfolio problem?

Does anyone know how to solve the following problem? I have tried to solve this but I'm lost since I have never dealt with a Stochastic Dynamic Programming problem with many variables. $max_{c_{t},\...
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54 views

What happened to leverage buyouts?

Back in the 1980s leveraged buyouts were a common event. Financiers like T. Boone Pickens would borrow money, buy a controlling interest in a publicly traded stock and then re-engineer the company, ...
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How to use the Girsanov theorem to prove $\hat{W_t}$ is a $\hat{\mathbb P}$-Brownian motion?

Let $T > 0$, and let $(\Omega, \mathscr F, \{\mathscr F_t\}_{t \in [0,T]}, \mathbb P)$ be a filtered probability space where $\mathbb P = \tilde{\mathbb P}$ (risk-neutral measure) and $\mathscr F_t ...
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37 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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56 views

Stiglitz 1976 on irrelevance of corporate financial policy

In this paper, Stiglitz gives a verbal argument as follows: Let us consider verbally what actions of the individuals are required to offset various actions by the firm. Assume the ...
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31 views

The coming US interest rates rise by the Fed. Will it affect the european bonds?

Recently, or maybe not so recently, there has been talk of the Fed going to enter in cycle of raising the interest rates. When interest rates are expected to be risen in the future, bonds with long-...
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271 views

Semi Annual Deposit that earns 5% Compounded Quarterly

I was asked: A man planned to endow 1000000 USD to his son on his son's 21'st birthday. How much is his semi-annual deposit in a special account that earns 5% compounded quarterly if the first ...
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56 views

Subscription Growth Rate Model?

Can someone provide a formula (or set of formulas) for growth models for subscription based businesses? I've looked, but could only find general references about this business model -- no formulas. ...
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45 views

Analysis of exogenous shocks on equities

Real Life Problem This one is a tough one and some crowd sourcing seems like a good way to get some feedback. I am trying to determine the effect of Non-Farm Payroll surprises on a subsector of the ...
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41 views

Evidence of firm borrowing and loans

I'm absolutely not from firm financing and look to read up on the subject, but mostly onto empirical stuff. Standard questions would be: What is the ratio of firms that finance themselves with bank ...
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61 views

Example of the change of measure proposed in Hansen (2012)

In this question, I'm continuing to explore the tools used/presented in Lars Hansen's Econometrica paper "Dynamic Valuation Decomposition within Stochastic Economies" (2012). I'm trying to compute an ...
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1answer
65 views

World Stock Markets that went up in 2008

We all know that the US stock market(s) collapsed in price in 2008, see https://en.wikipedia.org/wiki/United_States_bear_market_of_2007%E2%80%9309. I was wondering what countries' stock markets went ...