Questions tagged [asset-pricing]

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1answer
55 views

Example of complex structured products on FX market?

Lately I have been working a lot with the vol smile and different stochastic volatility models with FX forwards data. Now I want to work with pricing examples through simulations. Can you suggest some ...
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2answers
114 views

Risk-neutral pricing and statistical arbitrages

I'm studying the martingale approach to asset pricing. Dealing with the concept of risk-neutral probability, I came up with a question about the possibility of "arbitrages in expectation". I'll be ...
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0answers
37 views

What is the effect of covariance on the dynamics of a price

I want to know how can I see covariance affecting the dynamics of the price of an asset. I understand what the value for covariance and it's sign, but I do not get how it plays in the bigger picture. ...
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0answers
20 views

Continuous formula for the price of an asset paying one terminal dividend?

I have been trying to come up with ways to come up with an answer for a question we got in my class of "Asset Pricing Theory". The question is as follows: "Write the price of the asset at time t in ...
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0answers
41 views

What is the earliest mention of ROE as an asset pricing factor?

Can anyone tell me, what is the first application of ROE in an (empirical) asset pricing model? I am aware of the 2011 paper by Chen, Novy-Marx and Zhang. Are there any earlier papers on the matter?
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1answer
177 views

Forward Start Spread Options

Question: We have a spread option with payoff: $\max (P_{T} - HR\times G_T, 0)$, where $P$, $G$ are underlying prices and $HR$ is a constant. At time zero only contract $G$ is available for ...
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0answers
45 views

Fama-French 3, Carhart 4, Fama-French 5 Factor models return borderline 0% R2 (max. 6.6%). Time series regression

I am currently working on an industry specific time series analysis of European Equities between 201001 and 201812. I use the European Fama French factor returns (plus the momentum factor return) that ...
0
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1answer
38 views

Infinite Binomial Pricing no arbitrage

How to price a contract that pays only 1 at the first stock price drop? The stock follows an infinite binomial with no arbitrage $d<R<u$ condition. So the probability of the price going down is ...
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0answers
30 views

Using CFNAI index for identifying sample periods

I'm doing my Thesis on Asset pricing models and I would like to find out the effects of business cycles on the performance of asset pricing models for industry portfolios. My initial idea was to ...
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0answers
57 views

Brownian motion for modelling future asset values

Assume that an asset price $S$ is given by a Brownian motion. Argue from the definition why it is not possible to predict future values of the asset based on the past values of $S$. I am not sure ...
3
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1answer
75 views

What happens in the binomial model if the real-world probability is $0$

Consider a binomial model. Suppose we know that the price of a stock will become a certain value at the next timestep. That is, one of the two outcomes has $0$ real-world probability. Then it should ...
3
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0answers
67 views

How to perform Shanken (1992) correction for errors-in-variables issue?

I have two questions pertaining to the Shanken correction: The formula of Shanken correction shown in the Cochrane (2001) Asset Pricing book is as follow: $$\sigma^2(\hat{\lambda}_{OLS})=1/T[(\beta^{...
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0answers
29 views

Statistical procedures on comparing the four Asset pricing models [closed]

I'm a business student and currently writing my thesis on comparing asset pricing models on industry portfolio returns. Being a business student, I lack the knowledge for statistical analysis ; so I ...
1
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1answer
151 views

Bond discounting conventions

during the preparation for my thesis, I've come across some strange discrepancies between literature and the information I've been taught. It comes down to the proper way of discounting cash-flows of ...
6
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3answers
430 views

Most significant research articles for practical investors with research perspectives

I am an applied mathematician and recently I have decided to study the portfolio management theory. As a final objective, I want to manage my own portfolio and to try make some money on it using my ...
2
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0answers
69 views

Asset pricing and dividend discount model

I want to derive the dividend discount model from the asset pricing formula described in "Efficient Capital Markets: A Review of Theory and Empirical Work" by Eugene Fama 1970. The formula that I am ...
0
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1answer
39 views

Is there a robust way to calculate stock beta or factor exposure that's specific to crashes?

Commonly known factors like market, value, momentum etc. have positive expected returns because they draw-down unexpectedly and investors require a risk premium for holding them. This idea is extended ...
6
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1answer
135 views

How to perform cross-sectional asset pricing regression?

I'm wondering is that possible to get insignificant beta estimates in the time-series context, but highly significant risk premium associated with that beta in the cross-sectional regression? Any ...
1
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0answers
56 views

Creating a hedge portfolio out of 10 assets

Suppose I have historical return data on 10 assets. How can I create a hedge portfolio that prices all these assets in a factor model? I have chosen 3 factors: excess market return, SMB and HML from ...
1
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1answer
62 views

How to modify binomial tree to incorporate one more asset?

I wonder, what would happen if we use the binomial tree to price exchange option, an option to exchange one asset for another at the expiry date. Payoff is $\max(S_1-S_2,0)$ For instance, I have two ...
2
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1answer
231 views

Which proxy is the best to calculate daily risk free rate for a capital asset pricing model?

I need to get daily risk free rate to measure my capital asset pricing model. However, I am still confused on which proxy to use for that (my sample comprises German stocks). Some empirical studies ...
2
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1answer
60 views

Continuous Time Asset Model in Higham

I read Higham's derivation of the Black-Scholes equation in "An Introduction to Financial Option Valuation". The issue I am having is that it relies on some assumptions related to a continuous time ...
2
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0answers
57 views

Prove unique arbitrage-free price implies attainable

I just read a Corollary in a finance course note: Suppose the market is arbitrage free and $C$ is a contingent claim. Then $C$ is attainable if and only if it admits a unique arbitrage-free price. ...
2
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1answer
97 views

Asset pricing model factor need to be excess return?

In John Cochrane's Asset Pricing book and his video lecture, he states that asset pricing factors need to be excess returns, a traded portfolio. Is there a reason for that? I can't find explanation ...
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1answer
61 views

Unit exposures to Country,Industry and World factors in Fundamental Factor Risk Models

I may have what can be called a rudimentary question about Fundamental Factor models for Risk (ala Barra). Why is the exposure to World,Countries,Industries set to 1 instead of a real number. The ...
0
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1answer
74 views

How to apply derived beta to daily change?

I've taken three months of price return data for two instruments and calculated a $\beta$ between the two using the formula $\beta = \frac{Cov(x,y}{Var(y)}$ with the goal of estimating what the ...
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0answers
66 views

Cointegration between daily time series and intraday time series

I am working with time series data of daily prices, and intraday prices. For simplicity sake I will refer to the daily time series as 'A' and 'B', and the intraday time series of the same instruments ...
1
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0answers
21 views

From one period to multi period risk neutral pricing

For a one period economy, we have the price of an asset as: $ p_0 = E^Q [p_1 * \frac {B0}{B1}] $ where $B0 = e^{-r_0}$ = time 0 price of risk free bond maturing at time =1 and $r_0$ is known at t0. ...
1
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1answer
193 views

Daily idiosyncratic volatility?

I have a long daily times series of individual stocks and would like to obtain daily idiosyncratic volatility (keeping the same frequency). Apparently, the widely used methodology of Ang 2006 would ...
1
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1answer
59 views

Estimating French and Fama 3 - factors for global markets

I am working on this project where I am estimating FF three factors for some European countries. So I collected daily prices in US dollars for these countries since I will be using FF three factors ...
4
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2answers
335 views

Why is Fama French model a risk model

I get this question from interviewer about what is alpha model, what is risk model and why is Fama-French a risk model. As my understanding, alpha model forecast expected return, so the factor could ...
1
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2answers
103 views

What is the impact of inflationary expectation on stock price?

It is well known that, at least theoretically, stock prices are expected to rise in an inflationary environment. Now, my question is that does the same go for inflationary expectations; for example if ...
1
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1answer
114 views

Fama French paper regression questions

I am reading the paper and get the following question. I think here is how the regression is constructed: First step: $R_t^i = \alpha^i + \beta^i \cdot MarketBeta_t + \gamma_i\cdot Size_t + \nu \cdot ...
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0answers
35 views

Arbitrage and state price formulation

I must be missing something really obvious due to my temporary obtuseness. Can someone please help me see the obvious? :-P Thank you. I am just browsing Darrell Duffie's Dynamic Asset Pricing Theory. ...
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1answer
190 views

Are returns predictable, Campbell and Shiller (1988)

Following from the thread, Drivers of equity returns: dividend yield, change in P/E and dividend (or earnings) growth 1) Why are returns predictable from this, is there a reason? 2) Can we expect ...
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1answer
175 views

FF 5 factor model Intercept equal 0

In the paper A five-factor asset pricing model from Fama and French (JFE 2015) they say at page 3: "Treating the parameters in (4) as true values rather than estimates, if the factor exposures $...
1
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1answer
34 views

Where does this proof use the fact that the consumption level is positive?

Consider the following problem. Now consider the following theorem and proof. My question is, where is it used in the theorem that $c^\star + \alpha D^T \theta \ge 0$? That is, why is that important? ...
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3answers
138 views

Measuring alpha (Academia vs the Industry)

During academia, I learned to evaluate the performance of a portfolio by calculating alpha as the following: $\alpha_{i} = (R_{it}-R_{ft})-[\beta_i(R_{BMK_t}-R_{ft})]$ where $\alpha_i$ and $\beta_i$ ...
5
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1answer
223 views

Behavioral SDF: modelling sentiment risk premium

With reference to Behavioral Asset Pricing models, I know that the discount factor (or required rate of return) is equal to: Discount rate = Risk-free rate + Fundamental risk premium + Sentiment ...
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0answers
104 views

Fama-Macbeth with Liquidity Sorted Portfolios

I'm currently working on a paper in which I'm trying to see whether the liquidity premium is an observable phenomena when taken into the context of computer games. From my research online I've found ...
4
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1answer
242 views

Hansen and Jagannathan distance

Hansen and Jagannathan distance, or HJ-distance for time-series regression of excess test assets return on excess factor return reads: $HJ = \sqrt{\alpha'(E[RR']^{-1})\alpha}$ However, I am little ...
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3answers
216 views

What Process Does the Market Follow in the CAPM?

Consider a multiperiod version of the CAPM $$E_t[r_{i,t+1}-r_{f,t+1}]=\beta_{i,t}E_t[r_{m,t+1}-r_{f,t+1}]$$ where $E_t[r_{i,t+1}-r_{f,t+1}]$ is the time $t$ expectation of the time $t+1$ excess ...
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1answer
103 views

squaring stochastic calculus and other solutions [closed]

It is well-known that the solution to the stochastic SDE $$ dS = S_0(\mu dt + \sigma dWt) $$ is $$ S_t=S_0 e^{(\mu-\frac{\sigma^2}{2})t+W_t} $$ Were $\sigma=0$, this is simply the formula for ...
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0answers
67 views

Does pricing contingent claims under the EMM require us to define the distribution?

I am familiar with martingale pricing as primarily a notational abstraction which allows us to price contingent claims on $X_\tau$ by its conditional expectation. Usually, we interpret this to mean ...
1
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1answer
146 views

Period length and maximum data points on estimating the 5-year Beta-factor

I currently read chapter 8 Beta from Bali, Engle and Murray's book Empirical Asset Pricing: The Cross Section of Stock Returns and do not understand their estimation on the five-year Beta-factor (...
2
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1answer
672 views

Rsquared in Fama Macbeth using rolling window

I am trying to do Fama Macbeth regression on some tradable factors using 5-year rolling window updated monthly. However, I am a little bit confused when calculating the final R-squared of the model. I ...
3
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0answers
38 views

Is Consumption CAPM a special case of Intertemporal CAPM?

Intertemporal CAPM state variables are related to the future investment opportunity set. In Consumption CAPM the state variable is consumption ? Is it the correct way to think about it?
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0answers
979 views

Creating Factor mimicking portfolio returns

I have some trouble understanding how to create factor mimicking portfolio returns. As pointed out in this question, Tsay provides a small description, but I am unsure if my procedure is correct. In ...
7
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2answers
855 views

Is CAPM a cross sectional or time series model?

Given that CAPM is an equilibrium model, it prices the assets in absolute terms. Asset pricing studies use CAPM/ICAPM/CCAPM in a cross-sectional framework i.e. stocks with higher betas will have ...
3
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1answer
2k views

Interpreting the coefficients of Fama-MacBeth regression

According to Fama & MacBeth (1973) two-step regression, you start with estimating the beta factors. When applying the Fama-French 3-Factor model, you first run the linear regression $$r_{i,t}=α_i+...