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# Questions tagged [asset-pricing]

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33 views

### How did the author work this out for CAPM and Utility?

Edit:The book is "Foreign Exchange: Practical Asset Pricing and Macroeconomic Theory" by Adam S Iqbal. I asked a question relating to these equations a month ago at CAPM and Marginal Utility:...
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54 views

### Complete market price and incomplete market price specification

We know that if a liquid market of an asset exists, then the standard derivative pricing theorem implies an equivalent martingale measure exists, not necessarily unique, under which the discounted ...
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### CAPM and Marginal Utility: How does this derivation work?

I came across this obstacle in the book Foreign Exchange: Practical Asset Pricing and Macroeconomic Theory by Adam.S.Iqbal(I have attached screenshots below) For 1.40 the author claims that we must ...
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108 views

### Different risk neutral measure

I don't understand in the following example how there can be a single risk neutral measure. The risk free asset price $B$ at time $t = 1$ is $1+R$. An other asset $S$ at time $t=1$ can take two values:...
614 views

### Geometric Brownian Motion as the limit of a Binomial Tree?

Consider the price of a stock whose drift and volatility parameters are $\mu, \sigma$ respectively, over the time interval $[0, t]$. Suppose we use an $n$-stage binomial tree to model the price ...
59 views

### How to mathematically model Bid and Ask as two separate processes, and combine into a Price process?

Let's say you were modeling bid and ask as two separate processes. With their own mean and variance. And with the constraint that ask must be greater than or equal to bid. How would you then ...
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1 vote
28 views

### Terminal wealth in multiperiod asset pricing?

I am studying an asset pricing problem and I am having a tough time using finite horizon because I cannot properly define the terminal wealth. I consider agents with exponential utility, who can ...
73 views

### How to price a buffet or, how to price a subscription? [closed]

I've been thinking about a problem that may not be so specific lately. How do we price a buffet, or how do we price a subscription service? In more detail, let's assume that we are a cosmetics ...
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103 views

### The economic interpretation of stochastic discount factor (SDF) loadings

I'm trying to use the methodology proposed in the article "Taming the Factor Zoo: A Test of New Factors" to evaluate whether some new factors can have significant explanatory power on asset ...
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47 views

### Range Accrual pricing calculation

There is a discussion in https://www.investopedia.com/terms/r/rangeaccrual.asp which basically states how the CF from a Range Accrual would be determined. I wonder if there is any standard pricing ...
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### Interpreting Factor Coefficients for an Emerging Markets Fund against the Market and its Benchmark

I ran CAPM, FF3, FF5 and Carhart models for an emerging markets fund against the FF data for emerging markets and against its own benchmark. I am constantly getting negative SMB's which shows relevant ...
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51 views

### Asset pricing based on stochastic inflation discounting (inflation controlled by stochastic state variable)

Suppose there is an asset that pays fixed nominal payout $\delta_t = \delta$, with a constant real discount rate $\bar{r}$ and stochastic inflation $\pi_t$. Suppose the price follows a controlled ...
1 vote
103 views

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1 vote
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### Risk adjusted returns for a portfolio relative to CAPM

This is very likely a simple question. When following Lewellen (2015) (open access here), how should I compute alphas for portfolio returns relative to the CAPM and FF3? Do we simply subtract the (...
• 165
230 views

### Understanding completeness in this simple one-period exercise

Let's consider a one period model (t=0, 1) with one risk-free asset that yields r, and one risky asset. $S_t^j$ will be the value of the asset j=0,1 at time t=0,1, where j=0 is the risk-free asset and ...
1 vote
119 views

### Fama-MacBeth regressions to predict stock returns; confusion on which steps to use

When following Lewellen (2015) (open access here), I am confused as to whether I need to estimate any lambdas. As I already have values for lagged firm characteristics such as ROA and accruals etc. ...
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1 vote
49 views

### FM regressions for size groups when examining a cross section of expected stock returns

When doing FM regressions for size groups similar to Lewellen (2015) (open access here), should I obtain the cross sectional rolling return window betas using only the size group? (E.g only use large ...
• 165
1 vote
61 views

### Testing one asset pricing model against another a la Cochrane via change in $\hat\alpha' \text{cov}(\hat\alpha,\hat\alpha')^{-1}\hat\alpha$

I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. ...
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1 vote
53 views

### Scaling variables (Fraction vs % vs log) when regressing twelve month returns

Dear Stack community, My question is the following; If my dependent variable is twelve month returns. And as independent variables I have fiscal year variables like ROA and log variables like the log ...
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1 vote
51 views

### Testing one asset pricing model against another a la Cochrane: why this works

I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. I ...
• 3,166
1 vote
63 views

### Does including an additional pricing factor necessarily reduce the pricing errors?

I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. ...
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1 vote
101 views

### Testing one asset pricing model against another a la Cochrane: a counterexample

I am reading section section 14.6 of John Cochrane's lectures notes for the course Business 35150 Advanced Investments. On p. 239-240, he discusses testing one asset pricing model against another. I ...
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71 views

### Power-utility function for calculating Certainty equivalent

I have a question regarding how i should calculate 3.2-3.4, currently studying for an exam. What i don't get is how to acctually derive the certainty equivalent from the expected utility of gross ...
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53 views

### GRS test does not reject a scalar multiple of the market factor

I have been playing with the GRS test (see my R script below) in relation to Why not use a time series regression when the factor is not a return?. I generated a $10,000\times 26$ matrix of returns on ...
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226 views

### GRS test does not reject a nonsense factor in place of the market factor

I have been playing with the GRS test (see my R script below) in relation to Why not use a time series regression when the factor is not a return?. I generated a $630\times 26$ matrix of returns on 25 ...
• 3,166
1 vote
121 views

### Understanding mean-variance tautology from Roll's critique

One of the points of Roll's critique (Roll, 1977) can be summarized as follows (quoting Wikipedia): Mean-variance tautology: Any mean-variance efficient portfolio $R_{p}$ satisfies the CAPM equation ...
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