Asset Prices (asset + price)

Distribution by Scientific Domains
Distribution within Business, Economics, Finance and Accounting

Kinds of Asset Prices

  • underlying asset price

  • Terms modified by Asset Prices

  • asset price dynamics

  • Selected Abstracts


    Nobuhiro Kiyotaki
    We broadly define liquid assets, or monetary assets, as any asset that can be readily sold in the market and can be held by a number of people in succession before maturity. We ask in what environment is the circulation of liquid assets essential for the smooth running of the economy. By developing a canonical model of a monetary economy (i.e., where the circulation of liquid assets is essential), we are able to examine the interaction between liquidity, asset prices, and aggregate economic activity. [source]


    Rama Cont
    Constant proportion portfolio insurance (CPPI) allows an investor to limit downside risk while retaining some upside potential by maintaining an exposure to risky assets equal to a constant multiple of the cushion, the difference between the current portfolio value and the guaranteed amount. Whereas in diffusion models with continuous trading, this strategy has no downside risk, in real markets this risk is nonnegligible and grows with the multiplier value. We study the behavior of CPPI strategies in models where the price of the underlying portfolio may experience downward jumps. Our framework leads to analytically tractable expressions for the probability of hitting the floor, the expected loss, and the distribution of losses. This allows to measure the gap risk but also leads to a criterion for adjusting the multiplier based on the investor's risk aversion. Finally, we study the problem of hedging the downside risk of a CPPI strategy using options. The results are applied to a jump-diffusion model with parameters estimated from returns series of various assets and indices. [source]


    Prasanna Gai
    G15; E44; E58 ABSTRACT This note presents a simple model that nests the ,excess liquidity' and ,savings glut' hypotheses of the debate on the recent asset price boom. It clarifies the notion of investors' ,search for yield' and shows how financial frictions influence asset price dynamics. [source]

    The Effect of VaR Based Risk Management on Asset Prices and the Volatility Smile

    Arjan Berkelaar
    Value-at-risk (VaR) has become the standard criterion for assessing risk in the financial industry. Given the widespread usage of VaR, it becomes increasingly important to study the effects of VaR based risk management on the prices of stocks and options. We solve a continuous-time asset pricing model, based on Lucas (1978) and Basak and Shapiro (2001), to investigate these effects. We find that the presence of risk managers tends to reduce market volatility, as intended. However, in some cases VaR risk management undesirably raises the probability of extreme losses. Finally, we demonstrate that option prices in an economy with VaR risk managers display a volatility smile. [source]

    Aggregate Earnings and Asset Prices

    ABSTRACT A principal-components analysis demonstrates that common earnings factors explain a substantial portion of firm-level earnings variation, implying earnings shocks have substantial systematic components and are not almost fully diversifiable as prior literature has concluded. Furthermore, the principal components of earnings and returns are highly correlated, implying aggregate earnings risks and return risks are related. In contrast to previous studies, the correlation we report between the systematic components of earnings and returns is stable over time. We also show that the earnings factors are priced, in the sense that the sensitivities of securities' returns to the earnings factors explain a significant portion of the cross-sectional variation in returns, even controlling for return risk. This suggests earnings performance is an underlying source of priced risk. Our evidence that the information sets of returns and earnings are jointly determined implies cash flow risk and return risk are not fully separable, and raises the possibility that it is the common variation of earnings and returns that is priced. [source]

    The Effect of Bank Credit on Asset Prices: Evidence from the Japanese Real Estate Boom during the 1980s

    bank credit; asset prices; financial regulation This paper studies whether bank credit fuels asset prices. Financial deregulation during the 1980s allowed keiretsus to obtain finance publicly and reduce their dependence on banks. Banks that lost these blue-chip customers increased their property lending, and serve as an instrument for the supply of real estate loans. Using this instrument, I find that a 0.01 increase in a prefecture's real estate loans as a share of total loans causes 14,20% higher land inflation compared with other prefectures over the 1981,91 period. The timing of losses of keiretsu customers also coincides with subsequent land inflation in a prefecture. [source]

    A Partially Observed Model for Micromovement of Asset Prices with Bayes Estimation via Filtering

    Yong Zeng
    A general micromovement model that describes transactional price behavior is proposed. The model ties the sample characteristics of micromovement and macromovement in a consistent manner. An important feature of the model is that it can be transformed to a filtering problem with counting process observations. Consequently, the complete information of price and trading time is captured and then utilized in Bayes estimation via filtering for the parameters. The filtering equations are derived. A theorem on the convergence of conditional expectation of the model is proved. A consistent recursive algorithm is constructed via the Markov chain approximation method to compute the approximate posterior and then the Bayes estimates. A simplified model and its recursive algorithm are presented in detail. Simulations show that the computed Bayes estimates converge to their true values. The algorithm is applied to one month of intraday transaction prices for Microsoft and the Bayes estimates are obtained. [source]

    Endogenous Random Asset Prices in Overlapping Generations Economies

    Volker Böhm
    This paper derives a general explicit sequential asset price process for an economy with overlapping generations of consumers. They maximize expected utility with respect to subjective transition probabilities given by Markov kernels. The process is determined primarily by the interaction of exogenous random dividends and the characteristics of consumers, given by arbitrary preferences and expectations, yielding an explicit random dynamical system with expectations feedback. The paper studies asset prices and equity premia for a parametrized class of examples with CARA utilities and exponential distributions. It provides a complete analysis of the role of risk aversion and of subjective as well as rational beliefs. [source]

    Inspecting The Mechanism: Closed-Form Solutions For Asset Prices In Real Business Cycle Models*

    THE ECONOMIC JOURNAL, Issue 489 2003
    Martin Lettau
    We derive closed-form solutions for asset prices in an RBC economy. The equations are based on a log-linear solution of the RBC model and allow a clearer understanding of the determination of risk premia in models with production. We demonstrate not only why the premium of equity over the risk-free rate is small but also why the premium of equity over a real long-term bond is small and often negative. In particular, risk premia for equity and long real bonds are negative when technology shocks are permanent. [source]

    Feedback Effects and Asset Prices

    THE JOURNAL OF FINANCE, Issue 4 2008
    ABSTRACT Feedback effects from asset prices to firm cash flows have been empirically documented. This finding raises a question for asset pricing: How are asset prices determined if price affects fundamental value, which in turn affects price? In this environment, by buying assets that others are buying, investors ensure high future cash flows for the firm and subsequent high returns for themselves. Hence, investors have an incentive to coordinate, which may generate self-fulfilling beliefs and multiple equilibria. Using insights from global games, we pin down investors' beliefs, analyze equilibrium prices, and show that strong feedback leads to higher excess volatility. [source]

    Evaluation Periods and Asset Prices in a Market Experiment

    THE JOURNAL OF FINANCE, Issue 2 2003
    Uri Gneezy
    We test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change the portfolio influence her risk attitude in markets. In line with the prediction of myopic loss aversion (Benartzi and Thaler (1995)), we find that more information and more flexibility result in less risk taking. Market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced. This result supports the findings from individual decision making, and shows that market interactions do not eliminate such behavior or its consequences for prices. [source]

    Do Capital Inflows Matter to Asset Prices?

    The Case of Korea
    F32; F21; G12 In the present paper, we investigate whether capital flows induce domestic asset price hikes in the case of Korea. This issue is relevant for crisis-hit economies trying to prevent a boom,bust cycle as well as in the formulation of macroeconomic policy objectives in emerging market economies. Korea has recently experienced large capital inflows, in particular a surge in portfolio inflows. Furthermore, asset prices, including stock prices, land prices and nominal and real exchange rates, have also appreciated. The empirical results, obtained using a vector autoregression model, suggest that capital inflow shocks have caused stock prices but not land prices to increase. The effects on the nominal and real exchange rates have been limited, which relates to the accumulation of foreign exchange reserves. [source]

    Transform Analysis and Asset Pricing for Affine Jump-diffusions

    ECONOMETRICA, Issue 6 2000
    Darrell Duffie
    In the setting of ,affine' jump-diffusion state processes, this paper provides an analytical treatment of a class of transforms, including various Laplace and Fourier transforms as special cases, that allow an analytical treatment of a range of valuation and econometric problems. Example applications include fixed-income pricing models, with a role for intensity-based models of default, as well as a wide range of option-pricing applications. An illustrative example examines the implications of stochastic volatility and jumps for option valuation. This example highlights the impact on option ,smirks' of the joint distribution of jumps in volatility and jumps in the underlying asset price, through both jump amplitude as well as jump timing. [source]

    Has the ECB increased interest rates too soon?

    ECONOMIC OUTLOOK, Issue 1 2006
    Article first published online: 26 JAN 200
    Even though the Eurozone recovery is far from entrenched, the ECB decided to raise interest rates towards the end of 2005 and another hike is expected soon. Those in the ECB who have been looking for a reason to start tightening for some time can point to an inflation rate that remains stubbornly above target as a justification. In this article we find that the price rises of non-energy industrial goods - particularly those for clothing and footwear - have remained very sticky when compared to the deflation seen in countries like the UK. A lack of competitive forces may be an issue - the impact of China and India on goods prices does not seem to be fully feeding through to consumers. And weak productivity in the distribution sector may have prevented retailers from driving down prices to the same extent as in the UK. Does the current ECB action form the start of a prolonged tightening cycle as seen in the US? Despite worries over asset price and credit growth - and here we argue that the ECB's reliance on monetary aggregates as a signal of impending inflation is misguided - there is a possibility that the ECB has acted at the same time that inflation is finally set to subside. Consequently, we expect a "wait and see" approach to further moves, and unless growth comes in much stronger than the 2.2% we expect in 2006, rates should end the year at around 2½%. [source]

    Expected Time Value Decay of Options: Implications for Put-Rolling Strategies

    FINANCIAL REVIEW, Issue 2 2008
    George F. Tannous
    G11; G12; G19; D46 Abstract Assuming the underlying asset price remains constant, previous studies show that the time value of an option decays gradually at a rate that accelerates over time and peaks at the expiration date. Thus, a significant portion of time value is lost in the four weeks leading up to expiration. This paper shows the time value of currently at- or near-the-money options should be expected to decay at a rate that decreases over time. The time values of options that are currently deep-in- or deep-out-of-the-money are expected to initially rise and then resume the normal decay pattern. [source]


    Jin-Chuan Duan
    This paper considers the pricing of options when there are jumps in the pricing kernel and correlated jumps in asset prices and volatilities. We extend theory developed by Nelson (1990) and Duan (1997) by considering the limiting models for our approximating GARCH Jump process. Limiting cases of our processes consist of models where both asset price and local volatility follow jump diffusion processes with correlated jump sizes. Convergence of a few GARCH models to their continuous time limits is evaluated and the benefits of the models explored. [source]

    The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data

    A. Steven Holland
    Neoclassical investment decision criteria suggest that only the systematic component of total risk affects the rate of investment, as channeled through the built-asset price. Alternatively, option-based investment models suggest a direct role for total uncertainty in investment decisionmaking. To sort out uncertainty's role in investment, we specify and empirically estimate a structural model of asset-market equilibrium. Commercial real estate time-series data with two distinct measures of asset price and uncertainty are used to assess the competing investment models. Empirical results generally favor predictions of the option-based model and hence suggest that irreversibility and delay are important considerations to investors. Our findings also have implications for macroeconomic policy and for forecasts of cyclical investment activity. [source]

    A Generalization of the Brennan,Rubinstein Approach for the Pricing of Derivatives

    THE JOURNAL OF FINANCE, Issue 2 2003
    António Câmara
    This paper derives preference-free option pricing equations in a discrete time economy where asset returns have continuous distributions. There is a representative agent who has risk preferences with an exponential representation. Aggregate wealth and the underlying asset price have transformed normal distributions which may or may not belong to the same family of distributions. Those pricing results are particularly valuable (a) to show new sufficient conditions for existing risk-neutral option pricing equations (e.g., the Black,Scholes model), and (b) to obtain new analytical solutions for the price of European-style contingent claims when the underlying asset has a transformed normal distribution (e.g., a negatively skew lognormal distribution). [source]

    An explicitly solvable multi-scale stochastic volatility model: Option pricing and calibration problems

    Lorella Fatone
    We introduce an explicitly solvable multiscale stochastic volatility model that generalizes the Heston model. The model describes the dynamics of an asset price and of its two stochastic variances using a system of three Ito stochastic differential equations. The two stochastic variances vary on two distinct time scales and can be regarded as auxiliary variables introduced to model the dynamics of the asset price. Under some assumptions, the transition probability density function of the stochastic process solution of the model is represented as a one-dimensional integral of an explicitly known integrand. In this sense the model is explicitly solvable. We consider the risk-neutral measure associated with the proposed multiscale stochastic volatility model and derive formulae to price European vanilla options (call and put) in the multiscale stochastic volatility model considered. We use the thus-obtained option price formulae to study the calibration problem, that is to study the values of the model parameters, the correlation coefficients of the Wiener processes defining the model, and the initial stochastic variances implied by the "observed" option prices using both synthetic and real data. In the analysis of real data, we use the S&P 500 index and to the prices of the corresponding options in the year 2005. The web site contains some auxiliary material including some animations that helps the understanding of this article. A more general reference to the work of the authors and their coauthors in mathematical finance is the web site © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:862,893, 2009 [source]

    Pricing VIX futures: Evidence from integrated physical and risk-neutral probability measures

    Yueh-Neng Lin
    This study derives closed-form solutions to the fair value of VIX (volatility index) futures under alternate stochastic variance models with simultaneous jumps both in the asset price and variance processes. Model parameters are estimated using an integrated analysis of integrated volatility and VIX time series from April 21, 2004 to April 18, 2006. The stochastic volatility model with price jumps outperforms for the short-dated futures, whereas additionally including a state-dependent volatility jump can further reduce out-of-sample pricing errors for other futures maturities. Finally, adding volatility jumps enhances hedging performance except for the short-dated futures on a daily-rebalanced basis. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:1175,1217, 2007 [source]

    Testing range estimators of historical volatility

    Jinghong Shu
    This study investigates the relative performance of various historical volatility estimators that incorporate daily trading range: M. Parkinson (1980), M. Garman and M. Klass (1980), L. C. G. Rogers and S. E. Satchell (1991), and D. Yang and Q. Zhang (2000). It is found that the range estimators all perform very well when an asset price follows a continuous geometric Brownian motion. However, significant differences among various range estimators are detected if the asset return distribution involves an opening jump or a large drift. By adding microstructure noise to the Monte Carlo simulation, the finding of S. Alizadeh, M. W. Brandt, and F. X. Diebold (2002),that range estimators are fairly robust toward microstructure effects,is confirmed. An empirical test with S&P 500 index return data shows that the variances estimated with range estimators are quite close to the daily integrated variance. The empirical results support the use of range estimators for actual market data. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:297,313, 2006 [source]

    An Importance Sampling Method to Evaluate Value-at-Risk for Assets with Jump Risk,

    Ren-Her Wang
    Abstract Risk management is an important issue when there is a catastrophic event that affects asset price in the market such as a sub-prime financial crisis or other financial crisis. By adding a jump term in the geometric Brownian motion, the jump diffusion model can be used to describe abnormal changes in asset prices when there is a serious event in the market. In this paper, we propose an importance sampling algorithm to compute the Value-at-Risk for linear and nonlinear assets under a multi-variate jump diffusion model. To be more precise, an efficient computational procedure is developed for estimating the portfolio loss probability for linear and nonlinear assets with jump risks. And the titling measure can be separated for the diffusion and the jump part under the assumption of independence. The simulation results show that the efficiency of importance sampling improves over the naive Monte Carlo simulation from 7 times to 285 times under various situations. We also show the robustness of the importance sampling algorithm by comparing it with the EVT-Copula method proposed by Oh and Moon (2006). [source]

    A Parsimonious Macroeconomic Model for Asset Pricing

    ECONOMETRICA, Issue 6 2009
    Fatih Guvenen
    I study asset prices in a two-agent macroeconomic model with two key features: limited stock market participation and heterogeneity in the elasticity of intertemporal substitution in consumption (EIS). The model is consistent with some prominent features of asset prices, such as a high equity premium, relatively smooth interest rates, procyclical stock prices, and countercyclical variation in the equity premium, its volatility, and in the Sharpe ratio. In this model, the risk-free asset market plays a central role by allowing non-stockholders (with low EIS) to smooth the fluctuations in their labor income. This process concentrates non-stockholders' labor income risk among a small group of stockholders, who then demand a high premium for bearing the aggregate equity risk. Furthermore, this mechanism is consistent with the very small share of aggregate wealth held by non-stockholders in the U.S. data, which has proved problematic for previous models with limited participation. I show that this large wealth inequality is also important for the model's ability to generate a countercyclical equity premium. When it comes to business cycle performance, the model's progress has been more limited: consumption is still too volatile compared to the data, whereas investment is still too smooth. These are important areas for potential improvement in this framework. [source]

    Over-the-Counter Markets

    ECONOMETRICA, Issue 6 2005
    Darrell Duffie
    We study how intermediation and asset prices in over-the-counter markets are affected by illiquidity associated with search and bargaining. We compute explicitly the prices at which investors trade with each other, as well as marketmakers' bid and ask prices, in a dynamic model with strategic agents. Bid,ask spreads are lower if investors can more easily find other investors or have easier access to multiple marketmakers. With a monopolistic marketmaker, bid,ask spreads are higher if investors have easier access to the marketmaker. We characterize endogenous search and welfare, and discuss empirical implications. [source]

    Efficiency, Equilibrium, and Asset Pricing with Risk of Default

    ECONOMETRICA, Issue 4 2000
    Fernando Alvarez
    We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the resulting pricing kernel with the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks. Additionally, we show that asset prices depend only on the valuation of agents with substantial idiosyncratic risk. [source]

    Equity Markets & the Economy

    ECONOMIC OUTLOOK, Issue 2 2001
    John Muellbauer
    Media commentary in the New Year has seen the word ,recession' increasingly associated with short-term US prospects, which seemed so positive only half a year ago. In this article, John Muellbauer discusses this ,boom to bust' phenomenon, the role of asset prices and the wider ramifications for global growth, exchange rates and the UK economy. [source]

    Monetary policy and financial imbalances: facts and fiction

    ECONOMIC POLICY, Issue 63 2010
    Katrin Assenmacher-Wesche
    Summary Following the financial crisis, many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances. We study quarterly data spanning 1986,2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions. This casts doubts on the leaning-against-the-wind view. We also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially. That finding, however, is sensitive to the Lucas critique. --- Katrin Assenmacher-Wesche and Stefan Gerlach [source]

    Wars and Markets: How Bond Values Reflect the Second World War

    ECONOMICA, Issue 271 2001
    Bruno Frey
    Historical events are reflected in asset prices. Based on a unique data-set, we analyse government bond prices of Germany and Austria traded on the Swiss bourse during the Second World War. Some war events generally considered crucial are clearly reflected in government bond prices; this holds, in particular, for the official outbreak of the war and the loss and gain of national sovereignty. Other events to which historians attach great importance are not reflected in bond prices, most prominently Germany's capitulation in 1945. The analysis of financial markets provides a fruitful method for evaluating the importance contemporaries attached to historical events. [source]

    What Is an Asset Price Bubble?

    An Operational Definition
    This paper reviews and analyses the current definitions of bubbles in asset prices. It makes the case that one cannot identify a bubble immediately, but one has to wait a sufficient amount of time to determine whether the previous prices can be justified by subsequent cash flows. The paper proposes an operational definition of a bubble as any time the realised asset return over given future period is more than two standard deviations from its expected return. Using this framework, the paper shows how the great crash of 1929 and 1987,both periods generally characterised as bubbles,prove not to be bubbles but the low point in stock prices in 1932 is a ,negative bubble.' The paper then extends this analysis to the internet stocks and concludes that it is virtually certain that it is a bubble. [source]

    Price and Volatility Transmission across Borders

    Louis Gagnon
    Over the past forty years, financial markets throughout the world have steadily become more open to foreign investors. With open markets, asset prices are determined globally. A vast literature on portfolio choice and asset pricing has evolved to study the importance of global factors as well as local factors as determinants of portfolio choice and of expected returns on risky assets. There is growing evidence that risk premia are increasingly determined globally. An important outcome of this force of globalization is increased comovement in asset prices across markets. This survey study examines the literature on the dynamics of comovements in asset prices and volatility across markets around the world. The literature began in the 1970s in conjunction with early theoretical developments on international asset pricing models, but it blossomed in the late 1980s and early 1990s with the availability of comprehensive international stock market databases and the development of econometric methodology to model these dynamics. [source]