Questions tagged [asset-pricing]
The asset-pricing tag has no usage guidance.
271
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Why is there a lot of focus on derivatives pricing and much less on stock pricing?
I am a quantitative finance student, and during the first year of this Master’s Degree I couldn’t help but notice that there’s a lot of focus on derivatives pricing and little or none on stock pricing....
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Most complete list of investment mistakes in stock markets
I'm looking for a (hopefully exhaustive or at least extensive) list of behavioral biases that are currently observable in the stock market. I'm well aware and replicated some of the evergreens such as ...
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to adjust the constraints for both liquidity demanders and suppliers if I include asset income tax on risky asset
I have a question related to Vayanos and Wang's article
I'm studying on this article for my course term project. I would like to some adjustment and changes on this article in order to improve it ...
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Implications of tautology of dividend discount model
The argument seems to go back to Fama 1970, LeRoy 1976, and observation that
expectation of prices at time $t + 1$ with the information set at time $t$
is by definition equal to prices at time $t$ ...
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how to merge these two crsp data sets
I'm not totally confident on how to merge these two monthly CRSP data sets. As I write this, it comes from two databases: crsp.mse and ...
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Is the market price of an asset always lower than the expected discounted value under the REAL WORLD measure?
The risk neutral measure is often said to reflect the risk aversion of investors. So intuitively, I would think that an asset's expected discounted value should be lower under the risk neutral measure ...
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Risk Factors, Portfolio Optimization
I really need help with a project that I am working on, for my university.I study in Ecuador and the research material here is very limited. Nonetheless I have tried my best to start with the basics ...
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Replication of Break points on Ken French's website
I want to replicate the break points in 5th, 20th and 25th percentile.
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Breakpoints.
Do you have any materials or any suggested ...
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How to add Yearly /Quarterly control variables on daily panel data?
I am working on a dataset where I have to regress daily stock return on daily ESG momentum scores, including some control variables. For market based measure of risk factors, I have added Fama-French ...
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Value of trading strategy
A trading strategy is defined as follows: starting capital $v_0 = 5$ and 1 risky asset holdings $\varphi_t = 3W_t^2-3t$ where $W$ is a Wiener process.
The problem is to find the probability of the ...
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191
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Epstein-Zin utility intuition
I working a lot with Epstein-Zin utility (standard in asset pricing models). But I am having some issues wrapping my head around some intuition for how this utility function works.
Let's think about a ...
- 6,850
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Asset pricing using a two period binomial tree
Recall that in the binomial model the risk-neutral probability for the price going up is given by p = 1+r−d / u−d where u > 1 and d < 1 specify the possible price jumps in the risky asset and r ...
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Fama MacBeth regression standard errors: sampling variations in the first stage
Following the notation of this post, the standard errors of the second stage coefficients is computed as $$\sigma^{2}(\hat{\lambda})=\frac{1}{T^{2}} \sum_{t=1}^{T}\left(\hat{\lambda}_{t}-\hat{\lambda}\...
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Hybrid Derivatives Modelling
Could you please recommend any good books and papers that thoroughly describe the pricing and modelling of Hybrid derivatives? I.e. this question is a "big list" question, the more the ...
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Pricing of factors - portfolio sorts
if I read that someone is using portfolio sorts to determine whether a factor is priced in the cross section ( risk premium ) is it the two-pass Fama-MacBeth regression?
Is there a material that would ...
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How to determine the fair value of "off-the-run" U.S. Treasury securities
In the U.S. Treasury securities market, there are seven (7) "on-the-run" coupon-bearing issues:
2 year
3 year
5 year
7 year
10 year
20 year
30 year
I believe the Fed uses a monotone convex ...
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Replication of results shown in 'Empirical Asset Pricing: The Cross Section of Returns' by Bali, Engle, and Murray
I'm currently trying to reproduce some results shown in the book 'Empirical Asset Pricing: The Cross Section of Returns' by Bali, Engle, and Murray. More precisely, I try to compute Table 7.3 and 9.1. ...
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What are the requirements for no arbitrage to exist in a chaotic/dynamical system?
Consider the continuous dynamical system
$$\alpha\ddot{S}+\dot{S}=\mathcal{F}(S,t),$$
such that $\alpha\in\mathbb{R}$ and $\mathcal{F}$ is real and analytic. We assume that if a solution for $S$ ...
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Pricing a contract
I'm currently trying to price some different kinds of contracts. I'm stuck on this following exercise, which I can't seems to find a good solution for. The following is assumed:
We are in a standard ...
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CRSP: Return including dividends
Using CRSP data, I tried to compute the historical returns (including dividends) of stocks according to
Total Return = (adjprc + (divamt / cumfacpr / facpr)) / prev_adjprc – 1,
where divamt is the ...
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Why the Esscher transform is the right transform for pricing formula?
A Wiener process has infinitely many states of the world at any time step. Does that not mean that there are infinitely many EMM's for any model that uses the Wiener process?
But then if there is only ...
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What are the most common methods to model fat tails in the changes of asset prices?
I was wondering what the most common, or most popular, ways - in both academia, and industry - there were to model the fat tails of volatility in asset prices changes.
I am presuming a basic Brownian ...
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Using the risk neutral version of the First Fundamental Theorem of Asset Pricing to derive a partial differential equation
I have to use the risk neutral version of the First Fundamental Theorem of Asset Pricing to
derive a partial differential equation (PDE) that the price/value process, $V_t = F(t,S_t)$,
of a self-...
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The minimal entropy martingale measure for insurance-linked securities pricing
Suppose that we have a CAT bond contract that pays coupons at discrete points in time as well as a principal at maturity time $T$ if no triggering event happens during the term of the contract. More ...
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110
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Why individual investors are attracted to lottery stocks is a puzzle?
Han et al. 2021 mention one puzzle in investment is
individual investors are attracted to stocks with high skewness,
so-called lottery stocks(...). This behavior is not consistent with
standard ...
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80
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Closed form expression for $\Bbb E(\mathbb{I}_{\{S_{1,T}>S_{2,T}>K \}})$
Is it possible to calculate analytically $\Bbb E(\mathbb{I}_{\{S_{1,T}>S_{2,T}>K \}})$, using the 2-dimensional normal probability function $\Phi_2$, where $S_{1,T}$ and $S_{2,T}$ follow ...
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Double sort portfolios [closed]
I am studiying the impact of two variables A and B on stocks returns. When I sort the stocks individually, I find that the long-short portfolios returns obtained for A and B exhibit high correlation. ...
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Factor Loading Precision/Details in Fama-French 3 Factors Model
I have a few questions regarding details about FF3F model.
In the equation like following,
$$
E(R_P)-r_f = \alpha +\beta_M[E(R_M)-r_f] + \beta_SSMB + \beta_V HML
$$
Are SMB and HML factors are ...
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49
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How the spread portfolio t-test is calculated?
within my master thesis I am calculating the Pastor and Stambaugh (2003) liquidity factor (https://static1.squarespace.com/static/5e6033a4ea02d801f37e15bb/t/5f629437c9d51c5d00ad3ff3/1600295992687/...
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Matrix with two columns - ESG Momentum Strategy
Background: I am conducting some research on equity returns on portfolios sorted on ESG Scores from Asset4. Specifically, I am trying to test if trading on long-short ESG momentum portfolios yields ...
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Breaking points of Fama French portfolios
My question is about the size breakpoint of Fama French portfolios. Anyone knows why in US market data they used the median as a size breakpoint to construct the six portfolios, but when they used the ...
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Local Evaluation Date in QuantLib
I am trying to construct a price history for swaps in QuantLib, i.e. to have a timeseries of daily prices for a given swap. I have my rates data on each day, but what I'm struggling with is the ...
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Manual Computation of Python QuantLib's NPV for Pricing of a Forward Rate Agreement
Following the question that I have asked on this link and response obtained, I have managed to price a 3x6 FRA using QuantLib Python, using the following codes:
...
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Variance of Random Walk with Drift
For Gaussian random variables $\xi_t$ with mean $\mu_t$ and standard deviation $\sigma$, consider the random walk with initial condition $P_0=100$, such that
\begin{equation}
P_t=P_{t-1}(1+\xi_t).
\...
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Show a model is complete but not free of arbitrage
Let $\mathcal{F}=\{\Omega, \emptyset\}$ be the trivial $\sigma$ -algebra, and consider the deterministic financial market model with zero interest rates, $S_{0} \equiv 1$, and $n=1$ additional asset $...
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Trade anything?
I have a question after reading the post below.
https://www.onlinebetting.org.uk/betting-guides/can-you-bet-on-anything-you-want.html
Question:
I want to bet on a niche topic or asset or anything that ...
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J-stat question on Linear Factor Models + Simulation, Wald test
I am exploring the wonderful library by K. Sheppard et al. on linear models applied to asset pricing. In particular, Fama Macbeth and two-step regression (leaving GMM for later)
My question is ...
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Is the initial value of the portfolio replicating a forward zero?
This is from the book Financial Calculus: An Introduction to Derivative Pricing by Martin Baxter.
By choosing appropriate weights in a portfolio of a stock and cash bond you can replicate the payoff ...
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1
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171
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Carhart 4 factor model and six factor model
The value of SMB of Fama French 3 factor model is calculated as follows:
$$
\frac{1}{3} (Small Value + Small Neutral + Small Growth) - \frac{1}{3} (Big Value + Big Neutral + Big Growth).
$$
However, ...
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Asset Pricing and Negative Prices
I am running an asset pricing study.
The data is from 1990 to 2020.
When the data is adjusted for dividends and splits, stock prices of several firms become negative.
How does one handle negative ...
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Fama and French HML and SMB factors
I am investigating the Fama and French model using a Bayesian selection procedure laid out by Barillas and Shanken (2018). When I plot the cumulative probabilities of each factor, I notice that for ...
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Fama French regression with dummy variable
I am looking to run Fama-French regression on a portfolio of stocks.
I am looking to specify a regime using a dummy variable.
This dummy variable could be a low volatility/ high volatility marker.
...
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Replicating Portfolio / Complete Market / Attainable Claim
Attempt So Far:
1) First Part:
I have shown that the market is arbitrage-free since the only possible portfolio for which $V_1^h\geq0 \ $ given that $V_0^h=0 \ $ is $h=(0,0,0)$ and this clearly ...
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Feynman-Kac representation of Black-Cox model
Consider the standard setup from Black and Cox (1976, Journal of Finance).
A firm issues a defaultable coupon bond to finance a productive asset that follows a geometric brownian motion:
$$dx_t = \mu ...
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Cauchy-Euler ODE with indicator function in coefficient
Consider the following Cauchy-Euler ODE, which is in particular the asset pricing equation for a (perpetual coupon defaultable) bond:
$$\frac12 \sigma^2 V^2 F_{vv}(V,t) + \mu V F_{v}(V,t) - r F(V,t) + ...
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Derivation defaultable bond price in Leland 1994 (Merton)
Consider the model in Leland (Journal of Finance, 1994).
The partial differential equation that describes the price of the (perpetual coupon defaultable) bond is:
$$\frac12 \sigma^2 V^2 F_{vv}(V,t) + \...
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Pricing kernel representation
I am reading this paper https://mpra.ub.uni-muenchen.de/4969/1/MPRA_paper_4969.pdf pp.6-7 on discrete-time bond pricing. The model adopted is a a common affine model,
the short rate follows
\begin{...
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Some basic questions using consumption CAPM
Say we are in a world described by the consumption CAPM. All investors in this world have quadratic utility. Also, assume that consumption is as follows:
$$c_{t+1} = (1+m_t)c_t + s_t c_t e_{t+1} $$
...
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Why in Fama-French factor model relative market capitalization and book-to-market aren't used directly for predicting return rate?
Fama and French use the following formula for predicting stock returns
\begin{align*}
r=r_{riskfree} + \beta_1(r_{market}-r_{riskfree})+\beta_2(SMB)+\beta_3(HML)
\end{align*}
which basically means ...
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Pricing binary options
A binary option pays an amount of money if an event takes place and zero otherwise. Binary options are usually used to insure portfolios against large drops in the stock market. On March 25, 2021 the ...
