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2
votes
2answers
225 views

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 ...
2
votes
2answers
109 views

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 ...
1
vote
1answer
54 views

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 ...
1
vote
1answer
28 views

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 ...
0
votes
1answer
38 views

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 ...
0
votes
1answer
62 views

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 ...
4
votes
0answers
168 views

ERP and FF 3-factor model

In a more conservative estimate than a simple historical average, Fama & French estimate (US) equity risk premium at 3-4% (e.g., Equity Risk Premium, JF, 2002). This suggests that in an APT-like ...
3
votes
0answers
20 views

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 ...
3
votes
0answers
72 views

why many option contract price less than minimum boundary price?

I downloaded data from NSE(National Stock Exchange) website regarding closing price of European Call Option written on Index. From standard textbook, I read that option contract must satisfy $C(t) ...
3
votes
0answers
189 views

GMM time-series regression factor model with factors that are not returns

Factor models with factors that are not returns are usually estimated and tested by cross-sectional regressions. However, there is a way to use time-series regression to estimate and test the model. ...
2
votes
0answers
33 views

Budget Constraint in Duffie's book

On Page 5 of Duffie's Dynamic Asset Pricing Theory, the budget-feasible set is defined as: $$X(q,e) = {e+D^T\theta \in R_+^s:\theta \in R^N, q\theta \leq 0}$$ Compared to Kerry Back's presentation of ...
1
vote
0answers
31 views

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 ...
1
vote
0answers
26 views

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 ...
1
vote
0answers
52 views

How to map shocks from VAR to news? (Academics)

I am trying to map shocks from VAR to discount-rate and cash-flows news following the paper of Campbell and Vuolteenaho (2004). It is said that news are a linear combination of shocks from VAR at ...
1
vote
0answers
58 views

How to value a portfolio of non-mature consumer loans?

I'm looking for the best way to value a portfolio of consumer loans that have NOT reached maturity and for which I do observe the payment/default history to date? I'm working with a large database of ...
1
vote
0answers
217 views

Market Standard Pricing Models for Fixed Income Securities (Vanilla)

To clarify my heading, I have been searching for a material that consolidates all standard Fixed Income Security Pricing. E.g. ...
0
votes
0answers
24 views

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 ...
0
votes
0answers
23 views

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 ...
0
votes
0answers
7 views

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 ...
0
votes
0answers
13 views

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 ...
0
votes
0answers
27 views

commodity asset pricing

This is not a quant question but more a fundamental question. At the moment, WTI next month’s contract is trading at $29/B. My question are: Is it safe to assume delivery cost at Cushing is priced ...