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Asset Pricing (asset + pricing)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting96%

Terms modified by Asset Pricing

  • asset pricing model
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  • asset pricing models
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  • asset pricing theory
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    Selected Abstracts

    ASSET PRICING WITH NO EXOGENOUS PROBABILITY MEASURE

    MATHEMATICAL FINANCE, Issue 1 2008
    Gianluca Cassese
    In this paper, we propose a model of financial markets in which agents have limited ability to trade and no probability is given from the outset. In the absence of arbitrage opportunities, assets are priced according to a probability measure that lacks countable additivity. Despite finite additivity, we obtain an explicit representation of the expected value with respect to the pricing measure, based on some new results on finitely additive measures. From this representation we derive an exact decomposition of the risk premium as the sum of the correlation of returns with the market price of risk and an additional term, the purely finitely additive premium, related to the jumps of the return process. We also discuss the implications of the absence of free lunches. [source]

    LIQUIDITY AND ASSET PRICING UNDER THE THREE-MOMENT CAPM PARADIGM

    THE JOURNAL OF FINANCIAL RESEARCH, Issue 3 2007
    Duong Nguyen
    Abstract We examine whether the use of the three-moment capital asset pricing model can account for liquidity risk. We also make a comparative analysis of a four-factor model based on Fama,French and Pástor,Stambaugh factors versus a model based solely on stock characteristics. Our findings suggest that neither of the models captures the liquidity premium nor do stock characteristics serve as proxies for liquidity. We also find that sensitivities of stock return to fluctuations in market liquidity do not subsume the effect of characteristic liquidity. Furthermore, our empirical findings are robust to differences in market microstructure or trading protocols between NYSE/AMEX and NASDAQ. [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]

    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]

    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]

    Conditional Asset Pricing and Stock Market Anomalies in Europe

    EUROPEAN FINANCIAL MANAGEMENT, Issue 2 2010
    Rob Bauer
    G12; G14 Abstract This study provides European evidence on the ability of static and dynamic specifications of the Fama-French (1993) three-factor model to price 25 size-B/M portfolios. In contrast to US evidence, we detect a small-growth premium and find that the size effect is still present in Europe. Furthermore, we document strong time variation in factor risk loadings. Incorporating these risk fluctuations in conditional specifications of the three-factor model clearly improves its ability to explain time variation in expected returns. However, the model still fails to completely capture cross-sectional variation in returns as it is unable to explain the momentum effect. [source]

    The Fundamental Theorem of Asset Pricing under Proportional Transaction Costs in Finite Discrete Time

    MATHEMATICAL FINANCE, Issue 1 2004
    Walter SchachermayerArticle first published online: 24 DEC 200
    We prove a version of the Fundamental Theorem of Asset Pricing, which applies to Kabanov's modeling of foreign exchange markets under transaction costs. The financial market is described by a d×d matrix-valued stochastic process (,t)Tt=0 specifying the mutual bid and ask prices between d assets. We introduce the notion of "robust no arbitrage," which is a version of the no-arbitrage concept, robust with respect to small changes of the bid-ask spreads of (,t)Tt=0. The main theorem states that the bid-ask process (,t)Tt=0 satisfies the robust no-arbitrage condition iff it admits a strictly consistent pricing system. This result extends the theorems of Harrison-Pliska and Kabanov-Stricker pertaining to the case of finite ,, as well as the theorem of Dalang, Morton, and Willinger and Kabanov, Rásonyi, and Stricker, pertaining to the case of general ,. An example of a 5 × 5 -dimensional process (,t)2t=0 shows that, in this theorem, the robust no-arbitrage condition cannot be replaced by the so-called strict no-arbitrage condition, thus answering negatively a question raised by Kabanov, Rásonyi, and Stricker. [source]

    A Fundamental Theorem of Asset Pricing for Large Financial Markets

    MATHEMATICAL FINANCE, Issue 4 2000
    Irene KleinArticle first published online: 25 DEC 200
    We formulate the notion of "asymptotic free lunch" which is closely related to the condition "free lunch" of Kreps (1981) and allows us to state and prove a fairly general version of the fundamental theorem of asset pricing in the context of a large financial market as introduced by Kabanov and Kramkov (1994). In a large financial market one considers a sequence (Sn)n=1, of stochastic stock price processes based on a sequence (,n, Fn, (Ftn)t,In, Pn)n=1, of filtered probability spaces. Under the assumption that for all n, N there exists an equivalent sigma-martingale measure for Sn, we prove that there exists a bicontiguous sequence of equivalent sigma-martingale measures if and only if there is no asymptotic free lunch (Theorem 1.1). Moreover we present an example showing that it is not possible to improve Theorem 1.1 by replacing "no asymptotic free lunch" by some weaker condition such as "no asymptotic free lunch with bounded" or "vanishing risk." [source]

    On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

    THE JOURNAL OF FINANCE, Issue 2 2007
    JACOB BOUDOUKH
    ABSTRACT We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of the dividend yield. Similarly, we find that payout (net payout) yields contains information about the cross section of expected stock returns exceeding that of dividend yields, and that the high minus low payout yield portfolio is a priced factor. [source]

    Investor Psychology and Asset Pricing

    THE JOURNAL OF FINANCE, Issue 4 2001
    David Hirshleifer
    The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models. [source]

    The Asset Pricing Palette: Cash Flows, Returns and Trading Behavior

    FINANCIAL REVIEW, Issue 4 2001
    Andrea J. Heuson
    G12 Abstract Asset pricing is the topic of the 2001 Eastern Finance Association Symposium and the five papers selected for this collection, which are summarized below, span a broad range of subjects that fall under the umbrella of the determinants of market prices. For example, the Schwartz and Moon article that introduces the symposium uses real options methodology to value firms whose cash flows are subject to multiple sources of uncertainty while the Luders and Peisl and Mixon analytical models that close the selections incorporate dual stochastic processes to derive relationships between information flow, trading volume and price volatility that are consistent with empirical evidence. In between, Mishra and O'Brien present new evidence on the important of index and factor selection when estimating the required return on equity and Spahr and Schwebach revisit the issue of time diversification by reintroducing a statistical construct from earlier times. Each of the works included here makes an important contribution to our understanding of the asset pricing process in a distinct area and opens new doors onto avenues for future research. [source]

    Modeling and Forecasting Realized Volatility

    ECONOMETRICA, Issue 2 2003
    Torben G. Andersen
    We provide a framework for integration of high,frequency intraday data into the measurement, modeling, and forecasting of daily and lower frequency return volatilities and return distributions. Building on the theory of continuous,time arbitrage,free price processes and the theory of quadratic variation, we develop formal links between realized volatility and the conditional covariance matrix. Next, using continuously recorded observations for the Deutschemark/Dollar and Yen/Dollar spot exchange rates, we find that forecasts from a simple long,memory Gaussian vector autoregression for the logarithmic daily realized volatilities perform admirably. Moreover, the vector autoregressive volatility forecast, coupled with a parametric lognormal,normal mixture distribution produces well,calibrated density forecasts of future returns, and correspondingly accurate quantile predictions. Our results hold promise for practical modeling and forecasting of the large covariance matrices relevant in asset pricing, asset allocation, and financial risk management applications. [source]

    The Effect of Fiduciary Standards on Institutions' Preference for Dividend-Paying Stocks

    FINANCIAL MANAGEMENT, Issue 4 2008
    Kristine Watson Hankins
    Many researchers apparently believe that some institutional investors prefer dividend-paying stocks because they are subject to the "prudent man" (PM) standard of fiduciary responsibility, under which dividend payments provide prima facie evidence that an investment is prudent. Although this was once accurate for many institutions, during the 1990s most states replaced the PM standard with the less-stringent "prudent investor" (PI) rule, which evaluates the appropriateness of each investment in a portfolio context. Controlling for the general decline in dividend-paying stocks, we find that institutions reduced their holdings of dividend-paying stocks by 2% to 3% as the PI standard spread during the 1990s. Studies of asset pricing and corporate governance should no longer consider dividend payments when evaluating the actions of institutional investors. [source]

    Price and Volatility Transmission across Borders

    FINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 3 2006
    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]

    Size and book to market effects and the Fama French three factor asset pricing model: evidence from the Australian stockmarket

    ACCOUNTING & FINANCE, Issue 1 2004
    Clive Gaunt
    Abstract The present study adds to the sparse published Australian literature on the size effect, the book to market (BM) effect and the ability of the Fama French three factor model to account for these effects and to improve on the asset pricing ability of the Capital Asset Pricing Model (CAPM). The present study extends the 1981,1991 period examined by Halliwell, Heaney and Sawicki (1999) a further 10 years to 2000 and addresses several limitations and findings of that research. In contrast to Halliwell, Heaney and Sawicki the current study finds the three factor model provides significantly improved explanatory power over the CAPM, and evidence that the BM factor plays a role in asset pricing. [source]

    The equity premium and the business cycle: the role of demand and supply shocks

    INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 2 2010
    Peter N. Smith
    Abstract This paper explores the effects of the US business cycle on US stock market returns through an analysis of the equity risk premium. We propose a new methodology based on the SDF approach to asset pricing that allows us to uncover the different effects of aggregate demand and supply shocks. We find that negative shocks are more important that positive shocks, and that supply shocks have a much greater impact than demand shocks. Copyright © 2009 John Wiley & Sons, Ltd. [source]

    No Arbitrage in Discrete Time Under Portfolio Constraints

    MATHEMATICAL FINANCE, Issue 3 2001
    Laurence Carassus
    In frictionless securities markets, the characterization of the no-arbitrage condition by the existence of equivalent martingale measures in discrete time is known as the fundamental theorem of asset pricing. In the presence of convex constraints on the trading strategies, we extend this theorem under a closedness condition and a nondegeneracy assumption. We then provide connections with the superreplication problem solved in Föllmer and Kramkov (1997). [source]

    STOCK PRICE VOLATILITY, NEGATIVE AUTOCORRELATION AND THE CONSUMPTION,WEALTH RATIO: THE CASE OF CONSTANT FUNDAMENTALS

    PACIFIC ECONOMIC REVIEW, Issue 2 2010
    Charles Ka Yui Leung
    Based on infinite horizon models, previous theoretical works show that the empirical stock price movement is not justified by the changes in dividends. The present paper provides a simple overlapping generations model with constant fundamentals in which the stock price displays volatility and negative autocorrelation even without changes in dividend. The horizon of the agents matters. In addition, as in recent empirical works, the aggregate consumption,wealth ratio ,predicts' the asset return. Thus, this framework may be useful in understanding different stylized facts in asset pricing. Directions for future research are also discussed. [source]

    Asset Pricing Information in Vintage REIT Returns: An Information Subset Test

    REAL ESTATE ECONOMICS, Issue 1 2005
    David H. Downs
    REIT return data prior to the new REIT era offer important asset pricing information. At issue is whether empiricists should focus attention on returns series covering only the new period. We use a generalized asset pricing and information subset test to disentangle REIT information from information available in several benchmark series. Results indicate that REIT returns are informative about the discounting process during the pre,new-era period. Thus, the distribution of vintage REIT returns is not fully explained by either broad market indexes or from size-based anomalies. This study should be viewed as a useful empirical precedent for those studying REIT data preceding the new REIT era. [source]

    Feedback Effects and Asset Prices

    THE JOURNAL OF FINANCE, Issue 4 2008
    EMRE OZDENOREN
    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]

    Are Judgment Errors Reflected in Market Prices and Allocations?

    THE JOURNAL OF FINANCE, Issue 3 2004
    Experimental Evidence Based on the Monty Hall Problem
    The question of whether individual judgment errors survive in market equilibrium is an issue that naturally lends itself to experimental analysis. Here, the Monty Hall problem is used to detect probability judgment errors both in a cohort of individuals and in a market setting. When all subjects in a cohort made probability judgment errors, market prices also reflected the error. However, competition among two bias-free subjects was sufficient to drive prices to error-free levels. Thus, heterogeneity in behavior can be an important factor in asset pricing, and further, it may take few bias-free traders to make asset prices bias-free. [source]

    Presidential Address: Liquidity and Price Discovery

    THE JOURNAL OF FINANCE, Issue 4 2003
    Maureen O'Hara
    This paper examines the implications of market microstructure for asset pricing. I argue that asset pricing ignores the central fact that asset prices evolve in markets. Markets provide liquidity and price discovery, and I argue that asset pricing models need to be recast in broader terms to incorporate the transactions costs of liquidity and the risks of price discovery. I argue that symmetric information-based asset pricing models do not work because they assume that the underlying problems of liquidity and price discovery have been solved. I develop an asymmetric information asset pricing model that incorporates these effects. [source]

    Investor Psychology and Asset Pricing

    THE JOURNAL OF FINANCE, Issue 4 2001
    David Hirshleifer
    The basic paradigm of asset pricing is in vibrant flux. The purely rational approach is being subsumed by a broader approach based upon the psychology of investors. In this approach, security expected returns are determined by both risk and misvaluation. This survey sketches a framework for understanding decision biases, evaluates the a priori arguments and the capital market evidence bearing on the importance of investor psychology for security prices, and reviews recent models. [source]

    Information in asset pricing: a wave function approach

    ANNALEN DER PHYSIK, Issue 1 2009
    H. Ishio
    Abstract This paper introduces a quantum-like wave function as an information wave function. We show how the option pricing partial differential equation can be re-written when we account for such information wave function. We use two stochastic differential equations, one of which relates to Nelson's hypothesis of Universal Brownian motion. We also provide for two examples which further highlight the proposed theory. [source]