# Tagged Questions

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### Fama-Macbeth regression in Eviews

I'm adding a new factor to Fama-French three-factor model. I have constructed portfolios and got 18 three-way sorted portfolios. Now, I think I have to do Macbeth procedure to test the model. I'm ...
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### Show if Arrow price vector $\pi$ exists, then the law of one price hold

Now, the proof I have read goes like this: Take assets 1 and 2, entirely identical. By assumption there is a pricing vector, i.e. $\sum_s\pi_sd^1_s=q^1$ and $\sum_s\pi_sd^2_s=q^2$ where $d^i_j$ is ...
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### Could someone teach me how to construct the portfolios by compute (like using R, Excel or Eviews)

Recently, I am doing my dissertation that covers asset pricing theory. The empirical test of Fama 3 factors model is an important part of this dissertation. Please let me review the fama model. Fama ...
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### Is This A Viable Alternative Options Pricing Method?

i'm currently a high school student who hasn't gone past Algebra II, and thus I have minimal Calculus knowledge. I know the basics of Integration and Derivation (drop the coefficient, raise to the ...
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### Arbitrage and completeness in multiperiod model?

Given a 2-period market with above stock price process along with a riskfree stock with a return of 5%, how do I determine whether the market is arbitrage-free and complete when I only have knowledge ...
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### subsamples versus dummy variable approach, Fama MacBeth (1973) procedure

I am running an asset pricing test (Fama MacBeth); regressing six month ahead excess stock returns on past six month return (momentum) and a number of control variables (B/M, Size etc). I have run my ...
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### Arrow-Debreu Equilibrium Pricing

I have this problem in asset pricing that I don't know how to solve. Here it is: Consider an economy with a complete set of Securities and $N$ states of the world Tomorrow. Assume that there are two ...
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### Asset Pricing: What happens to the Risk-Free rate and the Equity Premium?

What would a standard asset pricing model predict for the risk-free rate and the equity premium, if the volatility of consumption growth fell? My gut feel is that the equity premium should fall, but ...
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### CAPM - Do I use start or end of period prices?

If I use monthly price data in the standard CAPM, should I take the price at the beginning or the end of the month? What is the convention? Or does it not matter? Is there any literature that deals ...
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### Why Fama and French sort on June's size data and not of some other period?

In Fama and French (1993), p. 8, I read "In June of each year $t$ from 1963 to 1991, all NYSE stocks on CRSP are ranked on size (price times shares)." Later on the same page, they write "Book-to-...
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### Mathematically: How does increasing the number of assets reduce idiosyncratic risk?

As part of an Asset Pricing Module I'm currently taking, whilst looking at APT Ross (1974), we looked at how according to this model, risk originates from both systematic and idiosyncratic asset ...
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### Calculating expected annual returns [closed]

An economy contains these three assets: Asset A has standard deviation of returns (per annum) of 25% and market capitalisation $600m Asset B has standard deviation of 20%, market capitalisation$...
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### When are factors returns in asset pricing and how do we construct them?

I am very certain that the temperature in New York's Central Park plays a super-significant role in stock returns, so I take its daily averages and I want to test it in factor model. Cochrane (...
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### What is the intuition of a spread portfolio and how exactly is it constructed?

In a lot of papers spread portfolios are constructed, like in Harvey and Siddique (1999), Table IV, or in Fama and French (2005 from SSRN), page 15. First, why is it important to construct such ...
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### Derive an expression for the value of the asset as a function of time, V(t), t>=0

An investor deposits USD 300 in a bank account at time 0, reinvests all interest payments and continuously invests USD 300 per annum, until the total value of the deposits reaches USD 3312. At that ...
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### Fama-Macbeth second step confusion

I am confused on how to run the second step of the Fama Macbeth (1973) two step procedure. I have monthly stock returns and monthly Fama-French factors, for around 10,000 stocks. This creates an ...
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### Transaction costs estimate for investment strategy

I'm examining a strategy based on profitability. I sort UK stock into 10 portfolios based on their gross profits-to-total assets ratio. Then, I create long-short portfolios by subtracting the high ...
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### State Variables in a Bellman Equation

Can anyone explain to me exactly what a state variable is in a Bellman equation?? $$V(x,y)=max\space u(c)+\beta V(x',y')$$ In some models with capital savings it's the capital $k_t$ you walk into ...
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### Pricing options under a specific framework

I have a specific framework in mind and I would like to value options under this framework. I am not sure whether a closed form solution exists or Monte Carlo methods would work. The framework I have ...
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### How to derive what effect funding shocks have on conditional market betas? [closed]

I am unable to derive the correct result eq2 all my answers seem circular, any help would be much appreciated. It should basically end up saying that shocks that affect all securities compress betas ...
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### Why should a factor not priced and yet is relevant to the return generating process

I am reading Elton's AFA presidential adress article here. http://people.stern.nyu.edu/eelton/working_papers/Expected_Return_Realized_Return.pdf In the paper, he is warning against using the average ...
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### How to understand stock return comovement

In his book "Asset Pricing" chapter 20, Cochrane said For example, suppose that average returns were higher for stocks whose ticker symbols start later in the alphabet. (Maybe investors search ...
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### The portfolio whose return is the stochastic discount factor

I am trying to construct a portfolio whose return is $a + bm_{t+1}$ where $a$ and $b$ are some constants for a certain investor. $m_{t+1}$ is the stochastic discount factor at time $t+1$. I am ...
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### Distress firms and cross section returns

In George and Hwang's 2010 JFE paper, they are trying to resolve the so called distress risk and leverage puzzles. This is their explanation: This is a puzzle because high distress intensity or ...
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### Bayesian estimation of asset pricing models

I am interested in Bayesian methods in the context of financial economics and quantitative finance and have been looking for research which uses Bayesian parameter estimation on asset pricing models, ...
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### What are the empirical limitations to testing market efficiency?

I have encountered a rather elegant argument about the limitations of empirically testing for market efficiency, involving the central point that we do not know whether a result is due to the "true ...