Questions tagged [asset-pricing]
The asset-pricing tag has no usage guidance.
219
questions
2
votes
0answers
52 views
linear stochastic discount factor
I have heard some people say something like the following with regards to APT:
Let returns be given by the factor model
$r_t = B_tf_t + e$
with
$E(f_t) = \lambda_t$
Assume that factors are ...
1
vote
1answer
1k views
Is market price of risk always negative?
I might have a gap in understanding, so clarifying:
Basic pricing equation
$E(R) = - cov(m, R)$ where $R$ = excess return and $m$ = stochastic discount factor
(I think this is continuous case, in ...
3
votes
1answer
271 views
Anyone has detailed explanation on how to use epstein-zin preferences in asset pricing models
I'd be interested to know how Epstein-Zin preferences are used in, say, consumption-based asset pricing models. I'm looking for specific derivations (how you get the SDF) and possible numerical ...
2
votes
1answer
123 views
Covariance, stochastic discount factor (SDF) and risk aversion
John Cochrane states, that if the covariance between the stochastic discount factor and the payoff is zero - then risk aversion should have no impact on the pricing. I do not fully understand why this ...
3
votes
1answer
103 views
SML Interpretation
I follow this paper and estimated two different asset pricing models via systems of deep neural networks. Both models have the exact same input: firm-specific features for 10'000 (unique) US stocks ...
3
votes
1answer
113 views
Why are some metals in contango (inverted) forward curve and some in backwardation (normal) forward curve?
I am scrolling through the various metals on lme.com and some are in contango and some in backwardation. For example:
Copper: backwardation
Aluminium: contango
Further examination of other metals ...
0
votes
0answers
41 views
By how much do specific asset correlations increase during a market downturn?
It is well-known that asset return correlations of stocks increase during market downturns. But are there any general properties derived from empirical observation or evidence regarding by how much ...
3
votes
1answer
196 views
ETF pricing papers
May I request for research paper recommendations, if any, on existing models that study how the presence of ETFs affect equilibrium prices of the underlying assets?
I am exploring a project on a ...
1
vote
0answers
24 views
No Arbitrage condition for assets with different time frame
In the classic literature, one always assumes that the assets in the market are all available from the very beginning ($t=0$). And under such condition the market is arbitrage free iff there exists an ...
2
votes
0answers
60 views
Stocks with same volatility but different drifts
In the book Quant Job Interview Questions & Answers, in section 2, question 2.4 says suppose two assets in a Black-Scholes world have the same volatility but different drifts. How will the price ...
1
vote
1answer
101 views
What are industry fixed effects?
I have come across the term "industry fixed effects" in some papers in relation to cross sectional regressions in asset pricing.
I know what "fixed" regression models are, but not ...
0
votes
1answer
71 views
How is CAPM used to price an asset once it has been used to derive the assets expected return?
As I understand it (correct me if I'm wrong) the theoretical price of an asset should be the present value of all future cash-flows that it is expected to yield, discounted at the risk-free rate.
I am ...
2
votes
0answers
45 views
Question on the details of certain parameters in Sharpe Ratio [closed]
I'm puzzled about certain parameters in calculating the annualized Sharpe Ratio using monthly return data.
Average excess return: Does this mean the arithmetic average of all the monthly excess ...
2
votes
2answers
261 views
Cashflow Risk vs Discount Risk
Studying asset pricing, I often hear the terms cashflow risk and discount risk but I'm not sure what they mean? The Campbell/Shiller (1988) decomposition includes cashflows (future dividends) and ...
0
votes
1answer
89 views
Vasicek model - Bond price and volatility
Why does the bond price under the Vasicek model increase as the rate volatility increases? What is the intuition behind this?
1
vote
2answers
153 views
Clean vs dirty price for bonds
Why the clean price is mostly quoted in the US bond markets and the dirty price is mostly quoted in the European bond markets?
1
vote
1answer
76 views
How to simulate asset prices/returns that display market regimes?
Are there any techniques that can make a multivariate random number generating process for stock prices/returns, like geometric Brownian motion via Cholesky, also include the simulation of a finite ...
1
vote
0answers
36 views
Some questions to canonical correlations between principle components and asset pricing factors using R
I have done a asympotical principle component analysis (APCA), using eigen() in R, of the covariance matrix of a global dataset of excess returns.
I took the ...
1
vote
0answers
40 views
Use of Macaulay Duration to calculate the Funds Transfer Pricing Cost of an Amortizing Mortgage
I am asked to comment on the Funds Transfer Pricing methodology used by our Treasury to assign a Cost of Funds to a Loan. This is the current methodology:
Let us say there is a 2 year loan with an ...
3
votes
1answer
139 views
GRS Test in R with robust residuals
I'm testing certain asset pricing factor models (e.g. Fama and French 3 factor model) and want to check if the alphas of my time series regressions are jointly zero.
Most papers use the Gibbons, Ross,...
4
votes
0answers
79 views
SDF as an affine transformation of the tangency portfolio
I'm studying this paper. In the formulation of the theoretical setup they state:
Our goal is to explain the differences in the cross-section of returns
$R$ for individual stocks. Let $R_{t+1, i}$ ...
0
votes
0answers
61 views
Arbitrage strategy from Arrow Securities
I had this exercise and I calculated the prices of the Arrow Securities, Ļ1 = 0.5 and Ļ2 = -0.2. I know that Ļ2 is not arbitrage-free because -0.2 < 0, but I do not understand that how to interpret ...
0
votes
1answer
77 views
Can we use risk-neutral pricing to price a stock or a bond?
Can you please tell me whether if I can used risk-neutral pricing approach to price a stock or a bond ? (i.e. discount with risk free rate the future cashflows) ?
Thank you very much!
6
votes
3answers
372 views
Asset pricing textbooks
What are some asset pricing textbooks that give a solid introduction into the field?
I suggest one textbook per answer with a list of its pros and cons.
0
votes
0answers
73 views
Stock Price as Numeraire, Two Stocks & One Money Market Account
We have two uncorrelated Stock price processes and the classical Money-Market (MM) account. Under the MM Numeraire, both stocks are Martingales when discounted by the MM, as usual.
Question: I would ...
11
votes
1answer
471 views
Numeraire correlated to the traded asset
The Fundamental Theorem of Asset Pricing states that:
\begin{align*}
\frac{X_0}{N_0} &= \mathbb{E}^N{ \left[ \frac{X(t)}{N(t)}|\mathcal{F}_0 \right] }
\end{align*}
The usual conditions apply (both ...
2
votes
0answers
40 views
Applying GRS-test on non-normal residuals with autocorrelation
Is it valid to apply GRS-test (Gibbons, Ross and Shanken 1989) on non-normal and autocorrelated residuals?
I got residuals using 10 test-assets regressed on 3-factor and carhart.
If it is valid, how ...
1
vote
2answers
98 views
Asset Pricing and inferences - Intercept and relationship to returns
Ideally this question is very similar to What's the meaning of the intercept in asset pricing model?
I am regressing a "buys minus sells" portfolio returns to the Carhart factors.
The intercept ...
1
vote
1answer
89 views
true or false: the risk-neutral measure is useless in this situation
Example 2 of this Wiki article on the risk-measure describes how a stock price $S_t$ that is modeled with Geometric Brownian motion with drift $\mu$
$$
dS_t = \mu S_t dt + \sigma S_t dW_t
$$
can be ...
0
votes
0answers
17 views
Adding an economic policy uncertainty (EPU) variable to Fama French model
I would like to do test the significance of a new variable that I would include in the Fama French 5 factor model. The new variable would be the Economic Policy Uncertainty (EPU) index from Baker et ...
-1
votes
1answer
89 views
Risk Neutral Pricing, a quick question [closed]
I am a newbie.
The risk neutral pricing has the following formulation:
$$P=\frac{\hat{E(d)}}{R}$$,
But the discounted expected value has the formulation of:
$$P=\frac{E(d)}{R}$$.
The text book ...
2
votes
0answers
74 views
Fama Macbeth and Momentum factor
I am working on a Fama MacBeth regression with excess returns on the LHS and Size, Value an Momentum factors on the RHS. In literature, the Momentum factor is often definded as the cumulative past 6 ...
0
votes
0answers
46 views
How to find the derivative for a multi-factor geometric brownian motion model
Does anyone know how to find the derivative for a multi-factor geometric brownian motion model $ \frac { dS_{i}}{S_{i}} $. I have seen solutions for the standard GBM model however I suspect that the ...
1
vote
0answers
54 views
How do I maximize my expected utility of wealth?
Suppose I have a utility function say $U(p)=p^{1/2}$
and I bet on a basketball game.
I have my initial investment, payouts and probabilities of winning, how can I determine the maximum I need to bet ...
1
vote
0answers
86 views
CAPM and the Fama-MacBeth (1973)
I need to conduct the Fama-MacBeth (FM) procedure for my thesis to test the ability of the six-factor model to predict future expected returns. In univariate regressions of expected excess returns on ...
1
vote
1answer
167 views
Returns on the Fama-French size sorted portfolios
For my thesis, I need to replicate a specific research paper in the field of empirical asset pricing, mentioning the CAPM in particular. The data mainly consists of monthly returns on portfolios ...
1
vote
1answer
476 views
Bond quotes to EDSF
I am having a hard time understanding what "EDSF" (Eurodollar Synthetic Forward Curve) represents as a bond pricing benchmark. I have seen bonds quoted as spreads to EDSF with maturities < 2 years ...
0
votes
0answers
24 views
Bond agreggation
I'm working on an asset and liabilities model for life insurance as a school project, one of the inputs of the model is a bond portfolio, for the sake of optimization of computation speed (the model ...
1
vote
0answers
17 views
CS-Regression Three Factor Model
1# When would the three risk factors market, size and value be priced in the FF Three factor model when performing cs-regression? How do you know that they are priced?
2# How would it be possible to ...
3
votes
2answers
200 views
Why is $S(t) = e^{\alpha + \beta t + \sigma W(t)}$ used as a model for prices?
Why is the Geometric Brownian Motion defined as $S(t) = e^{\alpha + \beta t + \sigma W(t)}$ used as a model for stock prices? $S(t)$ has a lognormal distribution which is right skewed. Another problem ...
0
votes
0answers
26 views
Calculating R* in a two-asset world
In chapter 5 of John Cochrane's Asset pricing, we derive a state-space interpretation of the mean variance frontier by defining $R^*$ and $R^{e*}$. A little forward, we have this formulation:
$$R^* = \...
0
votes
0answers
25 views
Using monthly CRSP EWRET to build equally weighted portfolios based on market equity and book to value ( SAS)?
I was wondering if it is possible to download the EWRET variable from Wharton in order to construct equally-weighted portfolios and rebalance every June? I have seen a few fancy codes for this ...
1
vote
1answer
33 views
What is the consumption constraint in writing the continuous version of Asset Pricing Model?
In the first chapter of John Cochrane's Asset Pricing textbook, in order to calculate the price in discrete time, we solve the maximization problem of $Max\space E(\Sigma\beta^j U(c_{t+j}))$ when our $...
2
votes
0answers
237 views
Volatility Managed 6 Factor Model (Fama French) - Does it make sense?
after weeks of intense research and in spite of the current situation, I decided to ask the following question to some experts (you):
I would like to develop/investigate a volatility managed six ...
0
votes
0answers
20 views
How to build a Fama & French model based on the international data provided by French?
I am trying to obtain a 3 factor Fama French model based on the "International Research Returns Data" provided on French home page
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library....
0
votes
0answers
12 views
Central Pricing Relation CCAPM
I need to understand what to do, when i take the covariance of an expression that looks like this: $\operatorname{cov}_{t}\left(\frac{U_{1}\left(\tilde{c}_{t+1}\right)}{U_{1}\left(c_{t}\right)}, \...
1
vote
0answers
60 views
Derive Q-dynamics of $\ln S_t$ having multiplicative error structure
From Kwon, T. Y. (2012). Three essays on credit risk models and their bayesian estimation (Doctoral dissertation):
Assume the following log equity price model:
$$\ln S_t = g_S(V_t,t,\Theta_V) + Z_T$$...
0
votes
1answer
150 views
Some aspects of the market price of risk
I am a little confused about the market price of risk.
Take the following geometric Brownian motion:
$$dS_t = \mu S_t dt+\sigma S_t dW_t$$
The market price of risk is defined as:
$$\frac{\mu-r}{\...
0
votes
0answers
43 views
Why price with lower volatility yield higher expectation under risk neutral measure
Suppose $S_1$ and $S_2$ are two asset prices, such that, E[$S_1$] = E[$S_2$] under physical measure and $\sigma(S_1)$ > $\sigma(S_2)$. Then why E[$S_1$] < E[$S_2$] under the risk neutral ...
1
vote
0answers
88 views
Risk-neutral price of $H=e^{X_T^1+X_T^3}$
Let $B=(B_t^1,B_t^2,B_t^3)$ a $\mathbb R^3$-valued Brownian motion.
Let $r_t$ (risk free rate) be bounded and deterministic.
Let consider the DISCOUNTED market
$$d\overline X_t^1=\frac52dt+2dB_t^1-...
