Questions tagged [asset-pricing]
The asset-pricing tag has no usage guidance.
358
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Fama-Macbeth second step confusion
I am confused on how to run the second step of the Fama Macbeth (1973) two step procedure.
I have monthly stock returns and monthly Fama-French factors, for around 10,000 stocks. This creates an ...
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18
votes
4
answers
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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 ...
- 600
18
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6
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How to generate a random price series with a specified range and correlation with an actual price?
I want to generate a mock price series. I want it to be within a certain range and have a defined correlation with the original price series.
If I choose, say, oil, I want as many time series which ...
13
votes
1
answer
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What methods do I need to learn in order forecast asset price movements?
What are the standard models used to forecast asset price movements? For example, if I were to trade an option, what model would I use in conjunction with option pricing models to forecast the stock ...
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2
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What are the main differences between discrete and continuous time models when modeling asset price dynamics?
My intuition says that both approaches, discrete time models and continuous time models will be models (i.e. approximations) of reality. Therefore it should be possible to develop useful models in ...
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1
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Numeraire correlated to the traded asset
The Fundamental Theorem of Asset Pricing states that:
\begin{align*}
\frac{X_0}{N_0} &= \mathbb{E}^N{ \left[ \frac{X(t)}{N(t)}|\mathcal{F}_0 \right] }
\end{align*}
The usual conditions apply (both ...
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11
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2
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Why aren't the Fama-French 3 factors orthogonal to each other?
I am confused whether the factors in a multi-factor model should be orthogonal or not. Google searches do not give a well documented answer and I couldn't find one in our library's limited catalog ...
- 691
11
votes
3
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689
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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 $R_{t+1, i}$ ...
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10
votes
3
answers
13k
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What's the meaning of the intercept in asset pricing model?
I would like to understand the role of alpha (intercept) in the regression-based asset pricing model or $n$-factor models; one of the most famous of those one is the Fama-French 3-factor model.
...
- 2,486
10
votes
2
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What are the econometric assumptions in the Fama-MacBeth procedure (1973)?
Fama-MacBeth (1973) introduce a two stage cross-sectional regression method (http://en.wikipedia.org/wiki/Fama%E2%80%93MacBeth_regression).
If I was to regress stock prices (or returns) on a ...
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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.
- 3,166
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4
answers
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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 ...
- 443
9
votes
3
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2k
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Difference betweem martingale property and adapted filteration
What is the difference between a random process that is adapted to a filteration and one that had the martingale property. It seems the two notions are quite similar and would be helpful to construct ...
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1
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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 ...
- 469
9
votes
2
answers
236
views
St Petersburg lottery pricing & short investing horizons
I am a statistician (no solid background in finance). Please forward me to a book \ chapter \ paper to resolve the following general question.
Suppose we have a stock with the following monthly return ...
- 131
8
votes
1
answer
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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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1
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What are the empirical limitations to testing market efficiency?
I have encountered a rather elegant argument about the limitations of empirically testing for market efficiency, involving the central point that we do not know whether a result is due to the "true ...
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1
answer
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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+...
- 2,946
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3
answers
1k
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Bayesian estimation of asset pricing models
I am interested in Bayesian methods in the context of financial economics and quantitative finance and have been looking for research which uses Bayesian parameter estimation on asset pricing models, ...
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7
votes
2
answers
21k
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What is the price pressure?
What is the definition of price pressure and what does it imply?
In a number of paper I read that the price pressure can influence the portfolio returns; can you explain why and in which way it can ...
- 2,486
7
votes
3
answers
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Most significant research articles for practical investors with research perspectives
I am an applied mathematician and recently I have decided to study the portfolio management theory. As a final objective, I want to manage my own portfolio and to try make some money on it using my ...
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3
answers
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Why are factor models so popular for risk analysis of portfolios?
As titled, my question consists on asking for why in the most of academic papers one almost always finds that when you try to model asset returns, one needs to adjust for risk factors before analyzing ...
- 2,486
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votes
1
answer
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What drives the idiosyncratic volatility puzzle?
I am currently analyzing the idiosyncratic volatility (IVOL) puzzle. (Ang, Hodrick, Xing, & Zhang (2006) found that idiosyncratic volatility (IVOL) and next-month cross-sectional returns are ...
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Why Fama and French sort on June's size data and not of some other period?
In Fama and French (1993), p. 8, I read "In June of each year $t$ from 1963 to 1991, all NYSE stocks on CRSP are ranked on size (price times shares)."
Later on the same page, they write "Book-to-...
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votes
3
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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$ ...
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1
answer
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Can options volume have an impact on the price of the underlying asset?
Can options volume affect the underlying asset price indirectly? I know that options buying/selling does not directly affect the price of the underlying asset (rather, the asset price contributes most ...
- 1,872
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votes
2
answers
2k
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What is the intuition of a spread portfolio and how exactly is it constructed?
In a lot of papers spread portfolios are constructed, like in Harvey and Siddique (1999), Table IV, or in Fama and French (2005 from SSRN), page 15.
First, why is it important to construct such ...
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votes
2
answers
13k
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Could someone teach me how to construct the portfolios by compute (like using R, Excel or Eviews)
Recently, I am doing my dissertation that covers asset pricing theory. The empirical test of Fama 3 factors model is an important part of this dissertation. Please let me review the fama model.
Fama ...
6
votes
1
answer
301
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How to perform cross-sectional asset pricing regression?
I'm wondering is that possible to get insignificant beta estimates in the time-series context, but highly significant risk premium associated with that beta in the cross-sectional regression?
Any ...
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votes
3
answers
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Jegadeesh and Titman 1993 Power of their test
I am reading this classic paper(http://www.business.unr.edu/faculty/liuc/files/BADM742/Jegadeesh_Titman_1993.pdf) and got confused by one of their arguments on their overlapping portfolio strategy to ...
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1
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Why can I use equilibrium asset pricing models to predict future returns?
This is a general question that applies to the CAPM and any version of the APT (e.g. the Fama & French three factor model). Speaking in terms of the APT:
Assuming a simple one-index version of the ...
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votes
3
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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 ...
- 595
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Why not use a time series regression when the factor is not a return?
I am trying to wrap my head around the statement that time series regression should not be used for testing a factor model when the factor is not a return. This has been mentioned in multiple posts, ...
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votes
0
answers
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Clustered vs. GMM-based standard errors: which ones to use in asset pricing?
Consider estimating an asset pricing model such as the CAPM or a multifactor model using monthly data. Petersen (2009) section "Asset pricing application" suggests use of standard errors ...
- 3,166
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votes
0
answers
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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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0
answers
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Newey-West standard errors in Fama-MacBeth regressions
I noticed that during the recent decade most of papers, which use Fama-MacBeth regressions compute Newey-West standard errors. I tried to find detailed description of this procedure in the books on ...
6
votes
0
answers
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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., ...
- 3,015
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0
answers
488
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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. ...
- 161
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answers
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Semi-strong efficiency and HFT
The semi-strong efficient market hypothesis states that
In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased ...
- 8,581
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votes
2
answers
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What is time-varying risk premium? Forecasting stock returns
I am trying to understand the concept 'Time-varying aggregate risk premium'.
Here is an extract from a Forecasting book, written by Rapach and Zhou,
"However, rational asset pricing theory posits ...
- 469
5
votes
1
answer
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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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1
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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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votes
1
answer
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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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3
answers
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How to hedge a derivative that pays the reciprocal of the stock price?
1) Suppose S is the stock price, how to hedge a derivative that pays $1/S_t$ at time $t$?
2) Suppose there will be a dividend of amount $d$ between $t$ and $T$, how to hedge a derivative that pays $...
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2
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Critique against consumption-based asset pricing theory?
I find asset pricing theory very vague and full of assumptions, especially the consumption-based modern theory. In its essence, the theory states that asset prices depend on the covariance between ...
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1
answer
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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 construct a yield curve? Also, since LIBOR implicitly took into account credit risk of ...
- 6,652
5
votes
1
answer
314
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Why should a factor not priced and yet is relevant to the return generating process
I am reading Elton's AFA presidential adress article here. http://people.stern.nyu.edu/eelton/working_papers/Expected_Return_Realized_Return.pdf
In the paper, he is warning against using the average ...
- 660
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1
answer
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Simulate (imaginary) asset prices using random numbers that follow a Frank Copula
I didn't understand how to simulate asset prices by using non normal random numbers.
I am assuming that it would be incorrect to use the standard Geometric Brownian Motion, since it is based solely ...
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5
votes
1
answer
1k
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Proving that Absence of Arbitrage does not imply law of one price
I am trying to prove that the Absence of arbitrage statement (AOA) does not necessarily imply the law of one price (LOP). For the definitions of these concepts I am using Cochrane's book "Asset ...
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votes
1
answer
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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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