Author: Sankarshan AcharyaPublisher:
ISBN:
Category :
Languages : en
Pages : 39
Book Description
Asset Pricing in an Incomplete Market with a Locally Risky Discount Factor
Author: Sankarshan AcharyaAsset Pricing in an Incomplete Market with a Locally Risky Discount Factor
Author: Sankarshan AcharyaPublisher:
ISBN:
Category :
Languages : en
Pages :
Book Description
We show that in an incomplete market with a locally risky discount factor (one with a positive instantaneous volatility), the risk-adjusted drift on any traded asset is equal to the drift on the minimum instantaneous variance portfolio, which we call the latent interest rate of the economy. We show that options can still be priced by replication if the drift and volatility coefficients are homogeneous of degree 0 in asset prices. Further, the market price of a pure discount bond is determined by our latent interest rate. Our latent interest rate contrasts the expected return on a zero-beta portfolio within the no riskless asset discrete time model. Option price data imply that our latent interest rate is significantly different and 20 times more variable (over time) than the observed spot interest rate.
Handbook of the Economics of Finance
Author: G. ConstantinidesPublisher: Elsevier
ISBN: 9780444513632
Category : Business & Economics
Languages : en
Pages : 698
Book Description
Arbitrage, State Prices and Portfolio Theory / Philip h. Dybvig and Stephen a. Ross / - Intertemporal Asset Pricing Theory / Darrell Duffle / - Tests of Multifactor Pricing Models, Volatility Bounds and Portfolio Performance / Wayne E. Ferson / - Consumption-Based Asset Pricing / John y Campbell / - The Equity Premium in Retrospect / Rainish Mehra and Edward c. Prescott / - Anomalies and Market Efficiency / William Schwert / - Are Financial Assets Priced Locally or Globally? / G. Andrew Karolyi and Rene M. Stuli / - Microstructure and Asset Pricing / David Easley and Maureen O'hara / - A Survey of Behavioral Finance / Nicholas Barberis and Richard Thaler / - Derivatives / Robert E. Whaley / - Fixed-Income Pricing / Qiang Dai and Kenneth J. Singleton.
Asset Pricing in an Incomplete Market with a Locally Risky Discount Factor
Author: Sankarshan AcharyaPublisher:
ISBN:
Category : Capital assets pricing model
Languages : en
Pages : 60
Book Description
Financial Markets and the Real Economy
Author: John H. CochranePublisher: Now Publishers Inc
ISBN: 1933019158
Category : Business & Economics
Languages : en
Pages : 117
Book Description
Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Beyond Arbitrage
Author: John Howland CochranePublisher:
ISBN:
Category : Arbitrage
Languages : en
Pages : 84
Book Description
It is often useful to price assets and other random payoffs by reference to other observed prices rather than construct full-fledged economic asset pricing models. This approach breaks down if one cannot find a perfect replicating portfolio. We impose weak economic restrictions to derive usefully tight bounds on asset prices in this situation. The bounds basically rule out high Sharpe ratios - `good deals' - as well as arbitrage opportunities. We present the method of calculation, we extend it to a multiperiod context by finding a recursive solution, and we apply it to option pricing examples including the Black-Scholes setup with infrequent trading, and a model with stochastic stock volatility and a varying riskfree rate.
Pricing by Arbitrage When All Assets are Risky
Author: Sankarshan AcharyaPublisher:
ISBN:
Category :
Languages : en
Pages :
Book Description
When a (locally) riskless asset does not trade, the market is necessarily incomplete and the risk-adjusted drift on any traded asset is equal to the drift on the minimum instantaneous variance portfolio, which we call the latent interest rate. Options can still be priced by replication if the drift and volatility coefficients of the underlying assets are homogeneous of degree zero in asset prices and a locally risky pure discount bond with the same maturity trades. Option price data imply that our latent interest rate is significantly different and twenty times more variable (over time) than the observed spot interest rate. Our model does not exhibit the smile effect which is significant within the Black-Scholes model.
Asset Pricing with Heterogeneous Consumers and Limited Participation
Author: Alon BravPublisher:
ISBN:
Category : Capital market
Languages : en
Pages : 64
Book Description
We present evidence that the equity premium and the premium of value stocks over growth stocks are explained in the 1982 1996 period with a stochastic discount factor (SDF) calculated as the weighted average of individual households' marginal rate of substitution with low and economically plausible values of the relative risk aversion (RRA) coefficient. Household consumption of non-durables and services is reconstructed from the CEX database. Since the above premia are not explained with a SDF calculated as the per capita marginal rate of substitution with low value of the RRA coefficient, the evidence supports the hypothesis of incomplete consumption insurance. We also present evidence is that a SDF calculated as the per capita marginal rate of substitution is better able to explain the equity premium and does so with a lower value of the RRA coefficient, as the definition of asset holders is tightened to recognize the limited participation of households in the capital market.
Asset Pricing
Author: John H. CochranePublisher: Princeton University Press
ISBN: 1400829135
Category : Business & Economics
Languages : en
Pages : 560
Book Description
Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
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