Questions tagged [asset-pricing]

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195 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 $R_{t+1, i}$ ...
6
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0answers
324 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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2k 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 ...
4
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0answers
422 views

GMM time-series regression factor model with factors that are not returns

Factor models with factors that are not returns are usually estimated and tested by cross-sectional regressions. However, there is a way to use time-series regression to estimate and test the model. ...
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253 views

ERP and FF 3-factor model

In a more conservative estimate than a simple historical average, Fama & French estimate (US) equity risk premium at 3-4% (e.g., Equity Risk Premium, JF, 2002). This suggests that in an APT-like ...
3
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0answers
537 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^{...
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52 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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250 views

Arrow-Debreu Equilibrium Pricing

I have this problem in asset pricing that I don't know how to solve. Here it is: Consider an economy with a complete set of Securities and $N$ states of the world Tomorrow. Assume that there are two ...
2
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0answers
59 views

linear stochastic discount factor

I have heard some people say something like the following with regards to APT: Let returns be given by the factor model $r_t = B_tf_t + e$ with $E(f_t) = \lambda_t$ Assume that factors are ...
2
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62 views

Stocks with same volatility but different drifts

In the book Quant Job Interview Questions & Answers, in section 2, question 2.4 says suppose two assets in a Black-Scholes world have the same volatility but different drifts. How will the price ...
2
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0answers
46 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 ...
2
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0answers
84 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 ...
2
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0answers
286 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 ...
2
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0answers
39 views

To price Municipal Bonds and risks I want to know the percent of unfunded pension liabilities ($3.8T) to total state and local gov liabilities

Unfunded pension liabilities keep growing and this seems alarming to both pension holders but also Municipal Bond holders. I would like to know how large this problem is to better price Munis and ...
2
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0answers
42 views

Cointegration between prices and dividends. How do I get the following expression?

Actually, I have two questions: 1. Let us assume that expected returns are constant. Then, we have the following expression for how the prices should be determined, provided that the operators are ...
2
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0answers
82 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 ...
2
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0answers
68 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 ...
2
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0answers
165 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
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92 views

why many option contract price less than minimum boundary price?

I downloaded data from NSE(National Stock Exchange) website regarding closing price of European Call Option written on Index. From standard textbook, I read that option contract must satisfy $C(t) \...
2
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0answers
44 views

Budget Constraint in Duffie's book

On Page 5 of Duffie's Dynamic Asset Pricing Theory, the budget-feasible set is defined as: $$X(q,e) = {e+D^T\theta \in R_+^s:\theta \in R^N, q\theta \leq 0}$$ Compared to Kerry Back's presentation of ...
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2answers
250 views

Pricing options under a specific framework

I have a specific framework in mind and I would like to value options under this framework. I am not sure whether a closed form solution exists or Monte Carlo methods would work. The framework I have ...
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0answers
36 views

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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0answers
38 views

Alpha - Time Series vs Cross Section Approach

I am currently reading Cochranes book on asset pricing. However, I get confused about one thing. He says that one could test a factor model (I will use the CAPM, just as he does), via a time series ...
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28 views

No Arbitrage condition for assets with different time frame

In the classic literature, one always assumes that the assets in the market are all available from the very beginning ($t=0$). And under such condition the market is arbitrage free iff there exists an ...
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0answers
37 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 ...
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0answers
43 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 ...
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0answers
61 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 ...
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0answers
98 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 ...
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0answers
17 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 ...
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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: $$\ln S_t = g_S(V_t,t,\Theta_V) + Z_T$$...
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0answers
88 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-...
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0answers
198 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 ...
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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 $$S(t_{i+1}) = S(t_i) + \mu \delta t S(t_i) + \sigma\sqrt{\delta t}S(t_i)Y_i,$$ ...
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0answers
42 views

How do flat demand curves for stocks allow for price changes?

Many models in asset pricing base their assumptions on a flat demand curve for stocks, as they are viewed as goods with perfect substitutes. With this, I understand that any sort of stock sale or ...
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0answers
401 views

How should I interpret the (insignificant) coefficients of Fama-French 3-factor model?

I am writing a mid-term thesis on the Fama-French factor model. I have built 5 portfolios sorted by the Book-to-Market ratio. The first portfolio is the lowest-BM group and the last portfolio is the ...
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0answers
43 views

Calculating the fundamental value of house price to separate bubble component from the price

The bubble in asset price is defined as the deviation of the asset value from its fundamentals, empirically Mendoza and Terrones (2008) measure the bubble as the deviation of an asset price from the ...
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0answers
22 views

Continuous formula for the price of an asset paying one terminal dividend?

I have been trying to come up with ways to come up with an answer for a question we got in my class of "Asset Pricing Theory". The question is as follows: "Write the price of the asset at time t in ...
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0answers
146 views

Fama-French 3, Carhart 4, Fama-French 5 Factor models return borderline 0% R2 (max. 6.6%). Time series regression

I am currently working on an industry specific time series analysis of European Equities between 201001 and 201812. I use the European Fama French factor returns (plus the momentum factor return) that ...
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0answers
33 views

Using CFNAI index for identifying sample periods

I'm doing my Thesis on Asset pricing models and I would like to find out the effects of business cycles on the performance of asset pricing models for industry portfolios. My initial idea was to ...
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0answers
149 views

Brownian motion for modelling future asset values

Assume that an asset price $S$ is given by a Brownian motion. Argue from the definition why it is not possible to predict future values of the asset based on the past values of $S$. I am not sure ...
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0answers
107 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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0answers
22 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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0answers
184 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 ...
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0answers
70 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 ...
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0answers
132 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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0answers
322 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 ...
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0answers
60 views

J-test and Empirical Model Performance of Conditional and Unconditional Estimations (as for example in Cochrane (1996))

Take for example the Consumption-based model with a power utility function estimated by Cochrane in his paper "A Cross-Sectional Test of an Investment-Based Asset Pricing Model" (1996). The following ...
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0answers
374 views

What is the meaning of factor sensitivity and its risk premium?

For the Fama and French three-factor model, $$R_{t}-R_{t,F}=\alpha+\beta_{MKT}\left(r_{t,MKT}-r_{t,f}\right)+\beta_{SMB}R_{t,SMB}+\beta_{HML}R_{t,HML}.$$ I run Fama-MacBeth cross sectional regressions,...
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0answers
55 views

Arbitrage and completeness in multiperiod model?

Given a 2-period market with above stock price process along with a riskfree stock with a return of 5%, how do I determine whether the market is arbitrage-free and complete when I only have knowledge ...
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0answers
68 views

How to understand stock return comovement

In his book "Asset Pricing" chapter 20, Cochrane said For example, suppose that average returns were higher for stocks whose ticker symbols start later in the alphabet. (Maybe investors search ...