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16 votes
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Most complete list of investment mistakes in stock markets

You find a (partial) list with many references in Table 1 from Liu et al. (2022, JFE) which I copy here: Hirshleifer (2015, ARFE) provides a great review of the literature on behavioural finance.
Kevin's user avatar
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13 votes
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Is market price of risk always negative?

Summary Yes, the market price derived from the moments of the SDF is negative. Assets pay high returns (are risky) if they negatively correlate with the SDF (and thus positively correlate with ...
Kevin's user avatar
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12 votes

Fama Mac-Beth (1973) vs Fixed effect

A more apples to apples comparison would be between (i) Fama-Macbeth procedure and (2) clustering standard-errors by date. Adding fixed-effects is somewhat different. Problem: cross-sectional ...
Matthew Gunn's user avatar
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12 votes

Asset pricing textbooks

I discuss the books I mentioned in the comments. They all deal with standard (theoretical) asset pricing (starting with one period utility maximisation and then branch off). Other books like Björk, ...
Kevin's user avatar
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10 votes
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Numeraire correlated to the traded asset

As @ilovevolatility explains, the seminal reference for this matter is Geman, El Karoui & Rochet (1995). We assume none of the assets are dividend paying, and they are strictly positive. There are ...
Daneel Olivaw's user avatar
10 votes
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Anyone has detailed explanation on how to use epstein-zin preferences in asset pricing models

Recursive Utility The traditional approach to consumption-based asset pricing includes time separable (additive) expected utility functions, $$U(C_t,C_{t+1})=u(C_t)+\beta \mathbb{E}_t[u(C_{t+1})],$$ ...
Kevin's user avatar
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9 votes

Most complete list of investment mistakes in stock markets

First, let me say that barring another post, Kevin should get accepted as the answer, but I wanted to add a class of biases that are in the literature, but not in the social science literature. In ...
Dave Harris's user avatar
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8 votes
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What drives the idiosyncratic volatility puzzle?

Preliminary The empirical finding of a strong negative cross-sectional relation between idiosyncratic volatility and future stock returns is highly inconsistent with the predictions of all theoretical ...
skoestlmeier's user avatar
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8 votes

Is CAPM a cross sectional or time series model?

To answer your question directly: CAPM is a cross-sectional model, and is NOT a time series model. CAPM aims at explaining variance of single asset's return by overall market return of the same ...
Will Gu's user avatar
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8 votes
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Are returns predictable, Campbell and Shiller (1988)

Let me start with a simple example. Suppose you have a dividend strip that pays an unknown dividend $D_T$. The gross return (something like 1.05 and NOT 5%!) on this security is, by definition, $$R_{t\...
fni's user avatar
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7 votes
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What is the intuition of a spread portfolio and how exactly is it constructed?

Does variable $x$ forecast returns? Let's say you have some variable $x$ that you think forecasts returns, and you want to conduct statistical tests of a null hypothesis that $x$ has nothing to do ...
Matthew Gunn's user avatar
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7 votes
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Interpreting the coefficients of Fama-MacBeth regression

No, you cannot interpret the average return for the factor as the risk premium. The second stage regression is equivalent to building a set of portfolios that have no net investment, a unit exposure ...
Tim Wilding's user avatar
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7 votes
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How to perform cross-sectional asset pricing regression?

I prefer thinking in terms of well measured vs. poorly measured rather than significant vs. insignificant: arbitrary p-value cutoffs and ignoring sensible priors can both be problematic. On the ...
Matthew Gunn's user avatar
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7 votes

Most significant research articles for practical investors with research perspectives

A lot has happened since Markowitz and Sharpe. While their work is still considered foundational, the empirical/practical relevance of their models has been questioned by later work. Here are a few ...
Alex C's user avatar
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7 votes
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Why is $S(t) = e^{\alpha + \beta t + \sigma W(t)}$ used as a model for prices?

We don't model the prices, we model the returns. The stock prices aren't explicitly modelled as log-normal, but rather this is a consequence of the actual model used to describe the returns. The core ...
oliversm's user avatar
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7 votes

What mechanisms does the market use to brining an asset back to the market line, as defined by CAPM?

Supply and Demand That's a great question and your question has a simple answer. @Daneel showed you the ``maths'' behind it. It boils down to: if an asset has too high returns than the CAPM predicts, ...
Kevin's user avatar
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6 votes
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Asset pricing model factor need to be excess return?

AP factors do not need to be excess returns. In case they are, corresponding prices of risk are conveniently equal to average factor values, since "factors price themselves": $$E[R_i] = \beta_{i} \...
Igor Pozdeev's user avatar
6 votes

How to price a phoenix and snowball type autocallable options?

Typically structures like this are traded as notes. They will be sold at a face value of 100%, where that is normally the combination of a zcb (ie 1y usd, say 97.5%), expected coupon (say +10%), short ...
will's user avatar
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6 votes

Asset pricing textbooks

I would recommend Cochrane as well. Pros Deals with both theoretical and empirical asset pricing. Nice mix of intuition and math. Cochrane has videos from his class on Asset Pricing on Youtube, so ...
Alba's user avatar
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6 votes

Most complete list of investment mistakes in stock markets

I'll post another answer here for completeness and to collect all answers and my own research here as a kind of summary. @all: Please feel free to edit my post if you want to contribute / complete the ...
T123's user avatar
  • 590
6 votes
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Geometric Brownian Motion as the limit of a Binomial Tree?

We can show that the moments of the Binomial tree agree with the moments of the continuous model for the case where we pick symmetrical probability value $p=0.5$. I will change the notation slightly (...
Jan Stuller's user avatar
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5 votes
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Economics of spoofing

Layering is a spoofing of buy(sell) orders sometimes complemented by higher(lower) sell(buy) orders that push the market up(down). Execution of a limit order above(below) would not be a concern, as ...
rrg's user avatar
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5 votes
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Formula for conditional expectation. Related to the Fundamental Theorems of Asset Pricing

Let define $\mathbb{Q}$ and $\mathbb{P}$ two equivalent probabilities on a filtered space $(\Omega,(\mathcal{F}_t)_{t\geq 0})$ Let define $Z_T=\frac{d\mathbb{Q}}{d\mathbb{P}}$ restricted to $\mathcal{...
M. Jeunesse's user avatar
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5 votes

Could someone teach me how to construct the portfolios by compute (like using R, Excel or Eviews)

First of all, it is not conceivable to do all that work by hand! You are crazy to have just thought it! Second, if you want to repeat your work with different datasets, I suggest you to use R, since,...
simmy's user avatar
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5 votes
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Is This A Viable Alternative Options Pricing Method?

You are trying to price an option through Monte Carlo simulations. Here is how it should work, assuming the Black-Scholes diffusion framework. Under the Black-Scholes model's assumptions, the value ...
Quantuple's user avatar
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5 votes
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What is time-varying risk premium? Forecasting stock returns

Another way of staying "time-varying risk-premium", is saying that the risk-premium is predictable. However, that the fact that the risk-premium is predictable does not means that you can make money ...
phdstudent's user avatar
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5 votes
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Hansen and Jagannathan distance

It would be easier to answer if you tell us where that equation came from (there are many ways of deriving the HJ distance) - in any case the numerator of your equation should be the expected return ...
phdstudent's user avatar
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5 votes

Which proxy is the best to calculate daily risk free rate for a capital asset pricing model?

There are many proxies for the risk free interest rate. For most purposes you may need a short term risk free rate, but there are in general no significant differences which one you chose. Treasury ...
skoestlmeier's user avatar
  • 2,926
5 votes

SDF as an affine transformation of the tangency portfolio

Coming back to my question after I replicated the paper for my thesis, where I found that my resulting SDF is always strictly positive and hovering around the value 1, just as expected given the ...
ln_greenspan's user avatar
5 votes
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Vasicek model - Bond price and volatility

Intuition is just that the bond price by definition is a convex function of the rates, and the expectation of a convex function increases with volatility. Note that this result is model independent.
Arshdeep's user avatar
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