# Tag Info

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### The Insane Sultan of Slickcrudistan: Calculating Currency Equilibrium

Using a simple textbook-approach, I will provide one possible answer here, showing that in this approach, the one thing that needs to be specified is "velocity of money" as regards sand dollars. I ...
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### Financial Economics Textbooks

The recommended books are decent. From these two I'd go with Bailey first and if you're comfortable with that, then LeRoy & Werner. The latter requires some background in linear algebra and ...

### Does an instant settlement system (such as blockchains) eliminate the possibility for short selling?

Imagine: I borrow 1 bitcoin from you and agree to pay you back $(1+r)$ bitcoin in a month. I immediately sell the bitcoin you lent me. One month from now, I buy $(1+r)$ bitcoin and pay you back. If ...
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### Example of Law of One Price holds but No Arbitrage Fails

Examples where this happens are always extreme and contrived. I can think of two kinds of examples. The first is where you have an asset that for some reason has a price of zero or negative but a ...
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### Are no arbitrage models and equilibrium models equivalent?

...no-arbitrage models (such as Black-Scholes and HJM) are equivalent to equilibrium models (such as CAPM or C-CAPM). Short Answer Yes, for models where asset prices are assumed to be Ito ...
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### Deriving and using the pricing equation

As regards the first question, the "$p_t=...$" expression is conceptually and qualitatively useful because, at the optimum, it relates price with consumption and expectations. Mathematically it is an ...

### Are options a form of insurance?

No, the primary purpose of options is not to provide insurance against changes in the price of the underlying instrument: options don't have a primary purpose, they don't have an agenda, and they don'...
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### Apply Ito's Lemma to exponential martingale

$\newcommand{\dd}{\, \mathrm{d}}$ If we apply Ito's lemma, then \begin{align*} \dd \xi_t &= -\xi_t \dd X_t + \frac 12 \xi_t (\dd X_t)^2\\ &= -\xi_t \left(\frac 12 \lambda_t^2 \dd t + \...
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### Who invented these key notions in Finance?

Net Present Value (NPV) as a soft concept existed probably even in antiquity but it was formalized and made popular by Irving Fisher in his book the Rate of Interest. Internal rate of return is ...
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### Stock pricing with cross ownership

The way I would think of this is as follows. Let us write the value of the first company as $V_{A}$and the second as $V_{B}.$ Given your definition, let me know if you agree with the following ...
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### Pricing a European call option while absence of arbitrage is violated

I believe there is not a unique price. Say, instead of buying the option you spent 0.5 on a half a unit of the asset $S^2_1$ This asset pays out $[0.4, 0.6, 0.8]$ which first order stochastically ...

### How does the Fama and French 3-factor model explain stock covariance?

There are two ways I could think of to answer this question. First, and I think this is what you are asking, "what is the covariance structure of two assets under the Fama-French 3-factor model?&...

### Any major theory/model that considers return due to idiosyncratic risk?

There are no major models that come to the conclusion that idiosyncratic risk can drive positive returns. The reason is that idiosyncratic risk is diversifiable. The models, however, do in fact ...

### Does the Lucas (1978) asset pricing model feature complete markets?

It seems to me that we might as well say that markets are complete. It seems to me to be somewhat inconsequential since this is a representative agent model and that market clearing requires that the ...
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### Why utility rather than expected utility in Cochrane's "Asset Pricing"?

As mentioned in the comments this comes down to stylistic choices, since as you correctly pointed out: $$u(c_t)+\beta E_t[u(c_{t+1})]=E_t[u(c_t)+\beta u(c_{t+1})]$$ However, in principle both ...

### If GOOG shares confer no voting rights, where do their value comes from?

The share value comes from expected discounted cash flows – either from dividends or from share price increases. These can be used for financing consumption from which people derive utility. See ...

### Under what condition would the law of one price hold?

Converting my comments to an answer. The law of one price (LoP) is an economic concept which posits that "a good must sell for the same price in all locations". This law is derived from the assumption ...

### Financial Economics Textbooks

ASSET PRICING THEORY: Cochrane, Asset Pricing is a good book in that it displays the way that hard-core asset pricers see the world. Huang and Litzenberger, Foundations for Financial Economics is ...
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### Asset pricing Coursera resources

I have uploaded all the videos on YouTube as two separate playlists which cover asset pricing part 1 & 2 courses. Asset Pricing part 1: https://www.youtube.com/playlist?list=...

### Why do housing and parking cost more in urban than in rural areas, but road access doesn't?

Land values tend to increase with population density, because it is typically possible to put the land to more productive use. A store operating in a dense urban core will have more potential ...

### Optimal pricing for Crypto-Currency Exchanges

You are missing the key element, transfer fees. If the transfer fees are large enough, then the marginal cost to move between exchanges just needs to stay inside the gross bid-ask spread. It can ...
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### Asset pricing vs Empirical asset pricing

As mentioned in Herr K's comment, asset pricing is the theory to price assets (such as equity, bonds, options, futures, swaps, etc). For this, you can use models like CAPM/Fama-French (returns), Black-...