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Pricing Theory (pricing + theory)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Kinds of Pricing Theory

  • asset pricing theory
    		•

    Selected Abstracts

    Extending the capital asset pricing model: the reward beta approach

    ACCOUNTING & FINANCE, Issue 1 2007
    Graham Bornholt
    G12; G24; G31 Abstract This paper offers an alternative method for estimating expected returns. The proposed reward beta approach performs well empirically and is based on asset pricing theory. The empirical section compares this approach with the capital asset pricing model (CAPM) and the Fama,French three-factor model. In out-of-sample testing, both the CAPM and the three-factor model are rejected. In contrast, the reward beta approach easily passes the same test. In robustness checks, the reward beta approach consistently outperforms both the CAPM and the three-factor model. [source]

    Land of addicts? an empirical investigation of habit-based asset pricing models

    JOURNAL OF APPLIED ECONOMETRICS, Issue 7 2009
    Xiaohong Chen
    This paper studies the ability of a general class of habit-based asset pricing models to match the conditional moment restrictions implied by asset pricing theory. We treat the functional form of the habit as unknown, and estimate it along with the rest of the model's finite dimensional parameters. Using quarterly data on consumption growth, assets returns and instruments, our empirical results indicate that the estimated habit function is nonlinear, that habit formation is better described as internal rather than external, and the estimated time-preference parameter and the power utility parameter are sensible. In addition, the estimated habit function generates a positive stochastic discount factor (SDF) proxy and performs well in explaining cross-sectional stock return data. We find that an internal habit SDF proxy can explain a cross-section of size and book-market sorted portfolio equity returns better than (i) the Fama and French (1993) three-factor model, (ii) the Lettau and Ludvigson (2001b) scaled consumption CAPM model, (iii) an external habit SDF proxy, (iv) the classic CAPM, and (v) the classic consumption CAPM. Copyright © 2009 John Wiley & Sons, Ltd. [source]

    Real estate and corporate valuation: an asset pricing perspective

    MANAGERIAL AND DECISION ECONOMICS, Issue 7 2001
    Liow Kim Hiang
    Property is a significant asset in the balance sheets of some Singapore industrial/commerce firms and hotel corporations. In this research, we take on the task of examining the relationship between real estate and stock market valuation of these business firms from an asset pricing perspective. Specifically, the real estate sensitivity of ,property-intensive', non-real estate stocks is investigated in both a three-index (market, sector and property) of stock returns and in an arbitrage pricing theory (APT) framework. The APT model is further recast as a multivariate non-linear regression model with across-equation restrictions. Using weekly returns on ,property-intensive' stocks in the period 1989,1998 and three shorter-sample periods, iterated non-linear seemingly regression techniques (ITNSUR) are employed to obtain joint estimates of stock sensitivities and their associated APT risk ,prices'. The ,real estate' sensitivity is found to be systematic and priced in the APT sense of corporations being paid an ex ante premium for bearing property market risk in investing and owning properties in two of the three sample periods (1989,1991, 1992,1994). The empirical results provide some support that property is a factor in corporate valuation, and is broadly consistent with the efficient markets hypothesis. The implications for portfolio and corporate management are examined. Copyright © 2001 John Wiley & Sons, Ltd. [source]

    AN EQUILIBRIUM GUIDE TO DESIGNING AFFINE PRICING MODELS

    MATHEMATICAL FINANCE, Issue 4 2008
    Bjørn Eraker
    The paper examines equilibrium models based on Epstein,Zin preferences in a framework in which exogenous state variables follow affine jump diffusion processes. A main insight is that the equilibrium asset prices can be computed using a standard machinery of affine asset pricing theory by imposing parametric restrictions on market prices of risk, determined inside the model by preference and model parameters. An appealing characteristic of the general equilibrium setup is that the state variables have an intuitive and testable interpretation as driving the consumption and dividend dynamics. We present a detailed example where large shocks (jumps) in consumption volatility translate into negative jumps in equilibrium prices of the assets as agents demand a higher premium to compensate for higher risks. This endogenous "leverage effect," which is purely an equilibrium outcome in the economy, leads to significant premiums for out-of-the-money put options. Our model is thus able to produce an equilibrium "volatility smirk," which realistically mimics that observed for index options. [source]

    The Impact of Collateralization on Swap Rates

    THE JOURNAL OF FINANCE, Issue 1 2007
    MICHAEL JOHANNES
    ABSTRACT Interest rate swap pricing theory traditionally views swaps as a portfolio of forward contracts with net swap payments discounted at LIBOR rates. In practice, the use of marking-to-market and collateralization questions this view as they introduce intermediate cash flows and alter credit characteristics. We provide a swap valuation theory under marking-to-market and costly collateral and examine the theory's empirical implications. We find evidence consistent with costly collateral using two different approaches; the first uses single-factor models and Eurodollar futures prices, and the second uses a formal term structure model and Treasury/swap data. [source]

    Presidential Address: Do Financial Institutions Matter?

    THE JOURNAL OF FINANCE, Issue 4 2001
    Franklin Allen
    In standard asset pricing theory, investors are assumed to invest directly in financial markets. The role of financial institutions is ignored. The focus in corporate finance is on agency problems. How do you ensure that managers act in shareholders' interests? There is an inconsistency in assuming that when you give your money to a financial institution there is no agency problem, but when you give it to a firm there is. It is argued that both areas need to take proper account of the role of financial institutions and markets. Appropriate concepts for analyzing particular situations should be used. [source]