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Questions tagged [asset-pricing]

The tag has no usage guidance.

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Common control variables for stock liquidity and idiosyncratic volatility

What set of control variables you would use if you are examining the impact of price change reaching a certain threshold on stock liquidity. To explain, price change, which is the independent variable,...
2
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1answer
41 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
38 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 ...
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1answer
53 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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47 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 ...
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20 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. ...
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1answer
107 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 ...
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1answer
44 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 ...
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13 views

How to illustrate confidence intervals and confidence bands for a wiggle path?

I would like to illustrate the concept of a uniform confidence band for a very wiggle path of, e.g. an asset price modelling stochastic process. Which kind of tools would you suggest to tackle that ...
4
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2answers
155 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 ...
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0answers
68 views

Finding no arbitrage prices of securities

I have some trouble with the last point of the following exercise (in the image below), where I am asked to find the prices of the risky securities such that every arbitrage is ruled out. My answer ...
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2answers
80 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 ...
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39 views

Unique risk neutral measure in Black Scholes vs Merton Model

I was going through a question on the unique risk neutral measure in the Black Scholes model : Unique risk neutral measure for Brownian Motion One of the answers said it is essentially because there ...
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1answer
94 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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29 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
149 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
83 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 $...
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1answer
33 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
108 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
184 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
42 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
119 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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162 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
100 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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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
81 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 (...
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0answers
52 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
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1answer
309 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
28 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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503 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 ...
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2answers
306 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 ...
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38 views

Why do different brokers have different settlement price?

I've noticed forthat CME, thinkorswim ,trading view and even WSJ all show different closing prices. If I wanted to make an algo what price do you use? I've heard that the CME prices aren't that ...
2
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1answer
925 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+...
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20 views

Which Firm Characteristics may have an influence on Coskewness

Latest since Kraus and Litzenberger (1976), higher order moments of the return distribution are considered relevant for asset pricing. In line with that, Harvey and Siddique (2000) and Barone Adesi ...
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2answers
175 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 ...
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1answer
89 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
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1answer
203 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. ...
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45 views

How do I calculate my Portfolio Variance when some of my assets are loans?

Following Modern Portfolio Theory, I am trying to calculate the covariance between the different assets in my portfolios. To calculate the covariance I need to know the Weight (which I can obtain ...
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92 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 ...
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1answer
140 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 ...
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1answer
112 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 ...
5
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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 ...
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1answer
340 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 ...
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1answer
261 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 ...
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0answers
218 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., ...
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3answers
139 views

Why aren't option pricing models more frequently used to value risky cash flows?

One way to think of the value of a risky firm is through expected measure theory. On the most basic level, the value of any asset is the convolution of the probability density function of its risky ...
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1answer
327 views

question about Quantopian alphalens

Quantopian has this package alphalens to do series of analysis on factors. I decided to dig in the code and make sense of the analysis. The question I have is: There are a lot of demean in the ...
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3answers
342 views

At the money put and call having the same price

This is a commonly asked question and I have not been able to find a satisfactory answer to it. Let me first phrase it here. Suppose that interest rates are $0$ and consider an at the money put and an ...
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1answer
446 views

Why is a martingale a risk-neutral measure

We have the risk-free valuation formula $$ \pi^X_i = B_T^{-1}B_iE_{P^*}[X|F_i]$$ Where $P^*$ is an equivalent martingale measure. Why is this martingale measure considered risk-neutral? All I know is ...
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187 views

Fair price and no arbitrage

The market is arbitrage-free iff there exists an equivalent martingale measure for the discounted price process of the stock. So in a world with a finite amount of possible outcomes $\Omega$ that ...