Questions tagged [asset-pricing]
The asset-pricing tag has no usage guidance.
206
questions
0
votes
2answers
48 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
32 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
28 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
38 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
51 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
41 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
38 views
Arbitrage strategy from Arrow Securities
I had this exercise and I calculated the prices of the Arrow Securities, π1 = 0.5 and π2 = -0.2. I know that π2 is not arbitrage-free because -0.2 < 0, but I do not understand that how to interpret ...
0
votes
1answer
52 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
221 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
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0answers
55 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 ...
9
votes
1answer
330 views
Numeraire correlated to the traded asset
Edit: is there any work published on Numeraire being correlated to one of the traded assets? I haven't found a single paper online on this topic. If anyone has links to any resources on this topic, ...
2
votes
0answers
29 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
82 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
78 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
14 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
78 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
44 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
26 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
49 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
58 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
49 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
136 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
20 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
13 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
180 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:
$$R^* = \...
0
votes
0answers
19 views
Using monthly CRSP EWRET to build equally weighted portfolios based on market equity and book to value ( SAS)?
I was wondering if it is possible to download the EWRET variable from Wharton in order to construct equally-weighted portfolios and rebalance every June? I have seen a few fancy codes for this ...
1
vote
1answer
31 views
What is the consumption constraint in writing the continuous version of Asset Pricing Model?
In the first chapter of John Cochrane's Asset Pricing textbook, in order to calculate the price in discrete time, we solve the maximization problem of $Max\space E(\Sigma\beta^j U(c_{t+j}))$ when our $...
2
votes
0answers
105 views
Volatility Managed 6 Factor Model (Fama French) - Does it make sense?
after weeks of intense research and in spite of the current situation, I decided to ask the following question to some experts (you):
I would like to develop/investigate a volatility managed six ...
0
votes
0answers
19 views
How to build a Fama & French model based on the international data provided by French?
I am trying to obtain a 3 factor Fama French model based on the "International Research Returns Data" provided on French home page
https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library....
0
votes
0answers
11 views
Central Pricing Relation CCAPM
I need to understand what to do, when i take the covariance of an expression that looks like this: $\operatorname{cov}_{t}\left(\frac{U_{1}\left(\tilde{c}_{t+1}\right)}{U_{1}\left(c_{t}\right)}, \...
1
vote
0answers
60 views
Derive Q-dynamics of $\ln S_t$ having multiplicative error structure
From Kwon, T. Y. (2012). Three essays on credit risk models and their bayesian estimation (Doctoral dissertation):
Assume the following log equity price model:
$$\ln S_t = g_S(V_t,t,\Theta_V) + Z_T$$...
0
votes
1answer
127 views
Some aspects of the market price of risk
I am a little confused about the market price of risk.
Take the following geometric Brownian motion:
$$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
42 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
87 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-...
1
vote
1answer
73 views
Understanding Fama Macbeth Regressions of Returns
I'm trying to understand what the Fama-Macbeth regressions of returns actually mean. The source of confusion is a 2013 Novy-Marx paper, in which he states the following:
"The first specification of ...
0
votes
0answers
41 views
Deriving CAPM from APT framework
I was wondering if it is possible to derive the CAPM from the APT?
My argument is that CAPM basically just is a 1 factor model, where the APT has multiple factors.
Can any of you guys help me?
0
votes
0answers
45 views
Replication of the paper: “A Comprehensive Look at the Empirical Performance of Equity Premium Prediction”
I recently replicated the paper "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction" and found out that my estimation of the equity premium differs from the data provided ...
0
votes
1answer
99 views
Question is about the data in the paper: “A Comprehensive Look at The Empirical Performance of Equity Premium Prediction”
I would like to ask a question if you download the data from the Amit Goyal website:
http://www.hec.unil.ch/agoyal/
You will see that there are two columns "CRSP_SPvw" "CRSP_SPvwx", they are ...
1
vote
0answers
98 views
Pricing of the compound coupon bond with PDE
I am now studying finance math using Steven E.Shereve's book.
Using Interest Rate models, We can the price for zero-coupon with maturity price $1$ under Hull-White interest rate model[page 274] and ...
3
votes
1answer
79 views
Time of Nasdaq daily close price
On the Nasdaq website It Is stated that the market closes at 4:00pm.
However I have historic intraday minute prices and I can see that that are minutes with prices after 4:00 PM (I am assuming its ...
5
votes
1answer
474 views
Libor to SOFR transition Yield Curve Construction
With the imminent transition from LIBOR to SOFR next year, what are the data points practitioners are using to the yield curve? Also, since LIBOR implicitly took into account credit risk of the ...
2
votes
2answers
96 views
Question regarding No Arbitrage price of a call option
I have a question regarding how to solve the NA price for a slightly modified call option.
Say that I have a money account $B(T)=e^{r(T-t)}$ and a stock dynamic $\frac{dS(t)}{S(t)}=(r-\delta)dt+\...
1
vote
1answer
61 views
How to determine the no arbitrage price of following claim? (change of numeraire)
How do I determine the no arbitrage price for claims such as $min(S_1(T),S_2(T))$ or $max(S_1(T),S_2(T))$? We can consider a standard Black Scholes model. Hence $S_i(T)=S_i(t)e^{(r-\sigma_i^2/2)(T-t)+\...
3
votes
1answer
75 views
What should happen to the equity risk premium as rates change?
Suppose I set forward-looking expected returns for capital markets using a dividend discount model framework, under which expected return for equities is the sum of dividend yield, expected trend ...
1
vote
1answer
82 views
What is market sensitivity and momentum sensitivity?
I have daily data of about 29 stock prices and 1 index prices of past 7 years
I calculated beta as the ratio of covariance(Rm,Ri) / variance(Rm)
I also calculated 200 days rolling momentum score as ...
0
votes
1answer
103 views
A financial market is complete if and only iff there exists a unique equivalent martingale measure
Do you have any intuition behind the following theorem :
A financial market is complete if and only iff there exists a unique equivalent martingale measure.
I understand the easier version of ...
1
vote
1answer
61 views
How do weights of a Mean-Variance optimized portfolio change as the Covariance matrix of the risky assets change?
I am learning a bit more about CAPM, and wanted to know if there was a specific way that weightings of assets in the optimal mean-variance portfolio changed (for constant risk aversion, expected ...
1
vote
1answer
122 views
What does “first-order effect” mean?
In the textbook Asset Pricing by John Cochrane, on p. 25, it says:
"This prediction holds even if the payoff $x$ is highly volatile and investors are highly risk
averse. The reason is simple: if you ...
1
vote
0answers
30 views
is it possible to make changes to use the affine property of Normal random variables, rather than the Central Limit Theorem?
I have proven the distribution of a discrete time model, evolving over a uniform mesh with $\delta t = T/L$ is given by
$$S(t_{i+1}) = S(t_i) + \mu \delta t S(t_i) + \sigma\sqrt{\delta t}S(t_i)Y_i,$$
...
