Questions tagged [asset-pricing]
The asset-pricing tag has no usage guidance.
3
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0answers
18 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^{...
1
vote
0answers
22 views
Statistical procedures on comparing the four Asset pricing models [on hold]
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
139 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
votes
3answers
352 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
votes
0answers
64 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
votes
1answer
29 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
votes
1answer
116 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
51 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
vote
1answer
57 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
votes
1answer
108 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
votes
1answer
51 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
votes
0answers
45 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
votes
1answer
74 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 ...
0
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1answer
55 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
votes
1answer
67 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 ...
1
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0answers
61 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
vote
1answer
148 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
vote
1answer
54 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
votes
2answers
289 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
vote
2answers
95 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
vote
1answer
106 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
34 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. ...
7
votes
1answer
159 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 ...
-1
votes
1answer
136 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
vote
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? ...
5
votes
3answers
119 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
votes
1answer
206 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 ...
1
vote
0answers
79 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
votes
1answer
189 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 ...
3
votes
3answers
186 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}]$$
where $E_t[r_{i,t+1}-r_{f,t+1}]$ is the time $t$ expectation of the time $t+1$ excess ...
-2
votes
1answer
101 views
squaring stochastic calculus and other solutions [closed]
It is well-known that the solution to the stochastic SDE
$$ 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 ...
1
vote
0answers
62 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
vote
1answer
113 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 (...
0
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0answers
57 views
Modern Portfolio Theory Proof--how does increasing number of stocks reduce variance
$Var(Portfolio) = [\sum_{i=1}^N wi^2 * (\sigma_i)] $+ All Covariance Terms
Let's say there are two stocks whose covariance is -1; then how would the efficient frontier of the portfolio consisting of ...
2
votes
1answer
492 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
32 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?
3
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0answers
739 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 ...
6
votes
2answers
567 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 ...
2
votes
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+...
1
vote
2answers
209 views
How to run Fama-French four-factor model cross-country panel analysis?
I am studying asset-pricing of "aircarft & defence" firms' stocks internationally covering 30 countries over 1980-2016. I can derive SMB, HML, and WML factors from Kenneth French's websites for ...
1
vote
1answer
92 views
Economic intuition behind pricing cash flow
I read the book of Skiadas Asset Pricing Theory 2009. I don't quite understand what does mean pricing cash flow. In the book it's written:
$\textbf{Definition 2.9}$ A cash flow $x^*$ is a pricing ...
3
votes
1answer
238 views
What are the consequences of violating Hansen-Jagannathan bounds?
Note I have added much more detail to this question I have decided to add the detail without altering the original text since a number of those of you offering assistance asked for clarification. ...
1
vote
0answers
97 views
Simulating asset returns: (Academia) state of the art
I want to run some simulation studies of (linear) factor models and for that reasons I am wondering about the features such a simulation should contain - every suggestion is welcome, I'll do my best ...
1
vote
1answer
180 views
Price series for an FX forward contract
Let's assume I am buying a NZD/USD 1Y forward for $1000000 on the 20/02/2017. The NZD/USD 1Y forward point is currently -270 and spot rate is 0.8325. (Example taken from here).
Now I want to have a ...
1
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1answer
123 views
Comparison of the four asset pricing models
I am analysing the four commonly used asset pricing models (CAPM, F3F, C4F, F5F) to determine which one is most effective.I have performed time series regressions on the 25 value weighted portfolios ...
6
votes
1answer
2k views
Fama Mac-Beth (1973) vs Fixed effect
Currently testing if monthly fund characteristics (size, capital flows, age, risk, persistence,...) explain funds abnormal returns.
My data is set as a panel with 1000 equity mutual funds over the ...
1
vote
1answer
453 views
The R-squared of the four factor model.
Why does papers such as Fama and French (2010) and Barras et al. (2010) construct equal weighted portfolio of all funds when they analyse the aggregate performance of mutual funds?
They both report ...
-1
votes
1answer
353 views
Carhart (1997) momentum factor loading
I am evaluating the performance of a sample of 1000 mutual funds over the period 2000 to 2017 using Carhart (1997) four factor model.
As a way to test for robustness, I use two benchmarks. The CRSP ...
6
votes
0answers
261 views
What are the essential characteristics of asset prices?
I think the question has already been asked about stylized facts of asset returns; this question regards the essential characteristics and normative assumptions used to evaluate asset prices. I.e., ...
