The branch of Finance that studies and models how specific assets (such as options, bonds and stocks) are priced.
Questions tagged [asset-pricing]
142 questions
14
votes
3 answers
Log-linearization of Euler equation with an expectation term
There are a few online resources available to help with log-linearization (e.g., here or here). However, log-linearization where an expectation is involved
is a little tricky because the log can't simply "pass through" the expectation…
ethan1410
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11
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What metrics would indicate a house bubble rather than genuine market values?
There are concerns that Auckland, New Zealand, is currently experiencing a housing bubble.
Auckland is one of the top 10 cities in the world on a housing unaffordability index.
The question is - how as economists can we tell whether housing prices…
dwjohnston
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10
votes
5 answers
Are options a form of insurance?
In my economics classes we have studied some really rudimentary concepts about insurance. I'm not really sure what qualifies as insurance to be honest.
I was wondering if options are considered a form of insurance? Is that the right way to think…
Stan Shunpike
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9
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2 answers
Examples of Factors in the ICAPM
The intertemporal capital asset pricing model (ICAPM) is different from the CAPM in that in the ICAPM, utility is conditioned on some set of state variables. The ICAPM results in a multifactor pricing model of the market if investor care about…
jmbejara
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8
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2 answers
Log-normality assumption in consumption based asset pricing
Consider a very basic discrete time representative consumer maximization problem with CRRA utility. There exist a risky asset with time $t$ price $p_t$ that pays time $t+1$ dividend $d_{t+1}$ , and a riskless asset with price $p_t^f$ that pays a…
vvv
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8
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1 answer
Hedging with volatility swaps?
I'm studying financial derivatives, and became curiosity in volatility products, more specifically volatility swaps. It always intrigued me how can you create products based on volatility. Who is interested in buying them? Other than traders who…
CMPSoares
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8
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2 answers
How is momentum justified as a common risk factor?
Momentum as a common risk factor?
This question is partly a follow-up to another question found here. In this other question it was noted in momentum is difficult to explain as a common risk factor in factor pricing models like the intertemportal…
jmbejara
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7
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1 answer
Pricing a European call option while absence of arbitrage is violated
Assume that we have a general one-period market model consisting of d+1 assets and N states.
Using a replicating portfolio $\phi$, determine $\Pi(0;X)$, the price of a European call option, with payoff $X$, on the asset $S_1^2$ with strike price $K…
BCLC
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7
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Stock pricing with cross ownership
Cross-ownership is a phenomenon where companies own parts of other companies they do business with. An example:
Two companies are now involved in the diamond operation, the mining group Anglo-American, and De Beers. The two are umbilically linked,…
Giskard
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7
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Are no arbitrage models and equilibrium models equivalent?
This YouTube video from WHU (starting from 3:50) claims that no-arbitrage models (such as Black-Scholes and HJM) are equivalent to equilibrium models (such as CAPM or C-CAPM).
He uses the Euler equation and the stochastic discount factor (SDF) as…
Alex
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6
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1 answer
Apply Ito's Lemma to exponential martingale
$\newcommand{\dd}{\, \mathrm{d}}$
Consider the exponential martingale,
$$
\xi_t^\lambda = \exp \left\{ - \int_0^t \lambda_s \dd z_s - \frac 12 \int_0^T \lambda_s^2 \dd s \right\},
$$
that is used in the statement of Girsanov's theorem (this…
jmbejara
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6
votes
1 answer
Is over-valuation of a start up genuinely detrimental to the start up's future?
I recently watched S02E01 of Silicon Valley.
In it, having demonstrated a breakthrough algorithm, the guys are pursued by investors with increasing funding offers.
However, the founder is warned with a higher valuation, there are higher…
dwjohnston
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6
votes
2 answers
Does the Lucas (1978) asset pricing model feature complete markets?
The Lucas (1978) asset pricing model seems to be one of the workhorse models in finance / asset pricing models. It also seems to be the case that the environment, with claims to $n$ (exogenous) productive units traded, features complete markets. I…
mathsquestions1
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6
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Uncovered interest parity and asymmetric capital controls
To derive the uncovered interest parity (UIP) condition we assume, among other things, that there is free movement of capital across countries.
But this cannot be directly applied to India because of capital controls. While foreigners are relatively…
Jyotirmoy Bhattacharya
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6
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2 answers
Any major theory/model that considers return due to idiosyncratic risk?
Are there any classical, major theories/models that consider positive return due to idiosyncratic risk? For example, CAPM only considers return due to systemic risk but not idiosyncratic risk. If there are no major theories/models that fit the…
Richard Hardy
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