Skip to main content
6 votes
Accepted

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 ...
John L.'s user avatar
  • 1,228
6 votes

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 ...
Matthew Gunn's user avatar
6 votes
Accepted

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 ...
jmbejara's user avatar
  • 9,355
6 votes
Accepted

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 ...
Michael's user avatar
  • 2,619
5 votes
Accepted

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 ...
Alecos Papadopoulos's user avatar
5 votes

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'...
410 gone's user avatar
  • 8,168
5 votes
Accepted

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 ...
1muflon1's user avatar
  • 56.7k
4 votes

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?&...
BKay's user avatar
  • 16.3k
4 votes

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 ...
BB King's user avatar
  • 6,158
4 votes

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 ...
jmbejara's user avatar
  • 9,355
4 votes
Accepted

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 ...
1muflon1's user avatar
  • 56.7k
4 votes

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 ...
Richard Hardy's user avatar
3 votes

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 ...
Dave Harris's user avatar
  • 2,006
3 votes

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 ...
emeryville's user avatar
  • 6,945
3 votes

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 ...
Fix.B.'s user avatar
  • 2,668
3 votes
Accepted

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=...
Aissan's user avatar
  • 146
3 votes

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 ...
Bill Clark's user avatar
3 votes
Accepted

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-...
python_enthusiast's user avatar
3 votes
Accepted

Calculating present value using Euler's number

$e^{-rt}$ is the continuous discounting factor while $(1 + r)^{-t}$ is its discrete counterpart. Identically/equivalently, there is the continuous manner of computing factors of variation, e.g. $1 + \...
keepAlive's user avatar
  • 1,425
3 votes

Nonseparable utility across states of nature: an intuitive example

I'm not aware of any intuitive justification for the state-non-separability in Epstein-Zin preference. However, as both @MichaelGreinecker and @afreelunch alluded to, there are micro/behavioral ...
Herr K.'s user avatar
  • 15.4k
3 votes

Budget line for mean variance utility

For example, considering the allocation between two identical assets with identical mean and variance but independent correlation. Then, the allocated portfolio reduces the variance but keeps the mean ...
Giskard's user avatar
  • 29.2k
3 votes

Deriving the constant relative risk aversion utility function

This is just a consequence of the (here tacit) assumption that $u'>0$.
VARulle's user avatar
  • 6,900
2 votes

Difference between objective and subjective distributions in asset pricing models?

[Edited to reflect @denesp comments] In asset pricing, the present value of an asset depends on expectations about the future. If you are sure asset A will be worth 100 tomorrow, it is likely to be ...
Fix.B.'s user avatar
  • 2,668
2 votes

Log-normality assumption in consumption based asset pricing

The typical two-period Lagrangian is $$\Lambda = \beta^t\cdot \Big(\frac{c_t^{1-\gamma} -1}{1-\gamma} + \lambda_t\cdot \big[(d_t+p_t) \pi_{t-1} + \pi_{t-1}^0- c_t - \pi_t p_t - \pi_t^0 p_t^0\big]\Big)...
Alecos Papadopoulos's user avatar
2 votes

Are options a form of insurance?

It could be an insurance if the price of the option trade is less than the cost of shifting the position you aim to insure if you take "Time Value" & "Intrinsic Value" into account. If you simply ...
2 votes

Asset pricing Coursera resources

Cochrane has made the material from his Coursera course available online on his personal website. This includes all of the video lectures (both part 1 and part 2). John notes that "it should be open ...
jmbejara's user avatar
  • 9,355
2 votes
Accepted

Ito's Lemma derivation

$$dx_t = \mu dt + \sigma dz_t \\ y_t = f(t, x_t)$$ A key idea here is that $\left( dx_t \right)^2=\left( \ldots \right)dt^2 + \left(\ldots\right) dzdt + \sigma^2 dz_t^2 = \sigma^2 dt$. The loose ...
Matthew Gunn's user avatar

Only top scored, non community-wiki answers of a minimum length are eligible