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## A note on the exact solution of asset pricing models with habit persistence

Fonte: Cambridge Univ Press
Publicador: Cambridge Univ Press

Tipo: Artigo de Revista Científica

Publicado em //2006
Português

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This paper provides a closed-form solution to a standard asset pricing model with habit formation when the growth rate of endowment follows a first-order Gaussian autoregressive process. We determine conditions that guarantee the existence of a stationary bounded equilibrium. The findings are useful because they allow to evaluate the accuracy of various approximation methods to nonlinear rational expectation models. Furthermore, they can be used to perform simulation experiments to study the finite sample properties of various estimation methods.; Fabrice Collard, Patrick Fève and Imen Ghattassi

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## A Dynamic Asset Pricing Model with Time-Varying Factor and Idiosyncratic Risk

Fonte: Oxford University Press
Publicador: Oxford University Press

Tipo: Artigo de Revista Científica

Publicado em //2009
Português

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This paper uses a multivariate GARCH model to account for time variation in factor loadings and idiosyncratic risk in improving the performance of the CAPM and the three-factor Fama–French model. I show how to incorporate time variation in betas and the second moments of the residuals in a very general way. Both the static and conditional CAPM substantially outperform the three-factor model in pricing industry portfolios. Using a dynamic CAPM model results in a 30% reduction in the average absolute pricing error of size/book-to-market portfolios. Ad hoc analysis shows that the market beta of a value-minus-growth portfolio decreases whenever the default premium increases as well as during economic recessions.; Paskalis Glabadanidis

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## A multi-period asset pricing model: implication for size and book-to-market effect

Fonte: Academy of International Business and Economics
Publicador: Academy of International Business and Economics

Tipo: Artigo de Revista Científica

Publicado em //2008
Português

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In light of the inadequacy of Sharpe's one-period Capital Asset Pricing Model (CAPM) in explaining stock returns, this paper develops a multi-period two-factor model that incorporates growth in earnings as an additional factor besides beta. This suggests that Sharpe's CAPM may be misspecified due to the omission of the earnings growth variable. In addition, it may explain why size and book-to-market effects are significant since earnings growth and the two factors are highly correlated.; http://www.encyclopedia.com/doc/1G1-190463126.html; Chien-Ting Lin

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## An Information-Based Framework for Asset Pricing: X-Factor Theory and its Applications

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 14/07/2008
Português

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A new framework for asset pricing based on modelling the information
available to market participants is presented. Each asset is characterised by
the cash flows it generates. Each cash flow is expressed as a function of one
or more independent random variables called market factors or "X-factors". Each
X-factor is associated with a "market information process", the values of which
become available to market participants. In addition to true information about
the X-factor, the information process contains an independent "noise" term
modelled here by a Brownian bridge. The information process thus gives partial
information about the X-factor, and the value of the market factor is only
revealed at the termination of the process. The market filtration is assumed to
be generated by the information processes associated with the X-factors. The
price of an asset is given by the risk-neutral expectation of the sum of the
discounted cash flows, conditional on the information available from the
filtration. The theory is developed in some detail, with a variety of
applications to credit risk management, share prices, interest rates, and
inflation. A number of new exactly solvable models are obtained for the price
processes of various types of assets and derivative securities; and a novel
mechanism is proposed to account for the dynamics of stochastic volatility and
dynamic correlation. A discrete-time version of the information-based framework
is also developed...

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## A two-Factor Asset Pricing Model and the Fat Tail Distribution of Firm Sizes

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 03/02/2007
Português

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In the standard equilibrium and/or arbitrage pricing framework, the value of
any asset is uniquely specified from the belief that only the systematic risks
need to be remunerated by the market. Here, we show that, even for arbitrary
large economies when the distribution of the capitalization of firms is
sufficiently heavy-tailed as is the case of real economies, there may exist a
new source of significant systematic risk, which has been totally neglected up
to now but must be priced by the market. This new source of risk can readily
explain several asset pricing anomalies on the sole basis of the
internal-consistency of the market model. For this, we derive a theoretical
two-factor model for asset pricing which has empirically a similar explanatory
power as the Fama-French three-factor model. In addition to the usual market
risk, our model accounts for a diversification risk, proxied by the
equally-weighted portfolio, and which results from an ``internal consistency
factor'' appearing for arbitrary large economies, as a consequence of the
concentration of the market portfolio when the distribution of the
capitalization of firms is sufficiently heavy-tailed as in real economies. Our
model rationalizes the superior performance of the Fama and French three-factor
model in explaining the cross section of stock returns: the size factor
constitutes an alternative proxy of the diversification factor while the
book-to-market effect is related to the increasing sensitivity of value stocks
to this factor.; Comment: 38 pages including 7 tables and 3 figures

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## Path Integral and Asset Pricing

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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#Quantitative Finance - Mathematical Finance#High Energy Physics - Theory#Quantitative Finance - Pricing of Securities

We give a pragmatic/pedagogical discussion of using Euclidean path integral
in asset pricing. We then illustrate the path integral approach on short-rate
models. By understanding the change of path integral measure in the
Vasicek/Hull-White model, we can apply the same techniques to "less-tractable"
models such as the Black-Karasinski model. We give explicit formulas for
computing the bond pricing function in such models in the analog of quantum
mechanical "semiclassical" approximation. We also outline how to apply
perturbative quantum mechanical techniques beyond the "semiclassical"
approximation, which are facilitated by Feynman diagrams.; Comment: 30 pages; a minor misprint corrected; to appear in Quantitative
Finance

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## Asset Pricing in an Imperfect World

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 23/10/2014
Português

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In a model with no given probability measure, we consider asset pricing in
the presence of frictions and other imperfections and characterize the property
of coherent pricing, a notion related to (but much weaker than) the no
arbitrage property. We show that prices are coherent if and only if the set of
pricing measures is non empty, i.e. if pricing by expectation is possible. We
then obtain a decomposition of coherent prices highlighting the role of
bubbles. Eventually we show that under very weak conditions the coherent
pricing of options allows for a very clear representation which allows, as in
Breeden and Litzenberger, to extract the implied probability.; Comment: arXiv admin note: substantial text overlap with arXiv:1406.0412

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## Heat Kernel Framework for Asset Pricing in Finite Time

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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A heat kernel approach is proposed for the development of a general,
flexible, and mathematically tractable asset pricing framework in finite time.
The pricing kernel, giving rise to the price system in an incomplete market, is
modelled by weighted heat kernels which are driven by multivariate Markov
processes and which provide enough degrees of freedom in order to calibrate to
relevant data, e.g. to the term structure of bond prices. It is shown how, for
a class of models, the prices of bonds, caplets, and swaptions can be computed
in closed form. The dynamical equations for the price processes are derived,
and explicit formulae are obtained for the short rate of interest, the risk
premium, and for the stochastic volatility of prices. Several of the
closed-form asset price models presented in this paper are driven by
combinations of Markovian jump processes with different probability laws. Such
models provide a rich basis for consistent applications in several sectors of a
financial market including equity, fixed-income, commodities, and insurance.
The flexible, multidimensional and multivariate structure, on which the asset
price models are constructed, lends itself well to the transparent modelling of
dependence across asset classes. As an illustration...

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## Housing risk and return: Evidence from a housing asset-pricing model

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 30/03/2011
Português

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#Quantitative Finance - Portfolio Management#Quantitative Finance - Pricing of Securities#Quantitative Finance - Statistical Finance

This paper investigates the risk-return relationship in determination of
housing asset pricing. In so doing, the paper evaluates behavioral hypotheses
advanced by Case and Shiller (1988, 2002, 2009) in studies of boom and
post-boom housing markets. The paper specifies and tests a multi-factor housing
asset pricing model. In that model, we evaluate whether the market factor as
well as other measures of risk, including idiosyncratic risk, momentum, and MSA
size effects, have explanatory power for metropolitan-specific housing returns.
Further, we test the robustness of the asset pricing results to inclusion of
controls for socioeconomic variables commonly represented in the house price
literature, including changes in employment, affordability, and foreclosure
incidence. We find a sizable and statistically significant influence of the
market factor on MSA house price returns. Moreover we show that market betas
have varied substantially over time. Also, results are largely robust to the
inclusion of other explanatory variables, including standard measures of risk
and other housing market fundamentals. Additional tests of model validity using
the Fama-MacBeth framework offer further strong support of a positive risk and
return relationship in housing. Our findings are supportive of the application
of a housing investment risk-return framework in explanation of variation in
metro-area cross-section and time-series US house price returns. Further...

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## Fundamental Theorem of Asset Pricing under Transaction costs and Model uncertainty

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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We prove the Fundamental Theorem of Asset Pricing for a discrete time
financial market where trading is subject to proportional transaction cost and
the asset price dynamic is modeled by a family of probability measures,
possibly non-dominated. Using a backward-forward scheme, we show that when the
market consists of a money market account and a single stock, no-arbitrage in a
quasi-sure sense is equivalent to the existence of a suitable family of
consistent price systems. We also show that when the market consists of
multiple dynamically traded assets and satisfies \emph{efficient friction},
strict no-arbitrage in a quasi-sure sense is equivalent to the existence of a
suitable family of strictly consistent price systems.; Comment: Final version. To appear in Mathematics of Operations Research

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## Entropy-Based Financial Asset Pricing

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 06/01/2015
Português

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We investigate entropy as a financial risk measure. Entropy explains the
equity premium of securities and portfolios in a simpler way and, at the same
time, with higher explanatory power than the beta parameter of the capital
asset pricing model. For asset pricing we define the continuous entropy as an
alternative measure of risk. Our results show that entropy decreases in the
function of the number of securities involved in a portfolio in a similar way
to the standard deviation, and that efficient portfolios are situated on a
hyperbola in the expected return - entropy system. For empirical investigation
we use daily returns of 150 randomly selected securities for a period of 27
years. Our regression results show that entropy has a higher explanatory power
for the expected return than the capital asset pricing model beta. Furthermore
we show the time varying behaviour of the beta along with entropy.; Comment: 21 pages, 6 figures, 3 tables and 4 supporting files

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## The fundamental theorem of asset pricing, the hedging problem and maximal claims in financial markets with short sales prohibitions

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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This paper consists of two parts. In the first part we prove the fundamental
theorem of asset pricing under short sales prohibitions in continuous-time
financial models where asset prices are driven by nonnegative, locally bounded
semimartingales. A key step in this proof is an extension of a well-known
result of Ansel and Stricker. In the second part we study the hedging problem
in these models and connect it to a properly defined property of "maximality"
of contingent claims.; Comment: Published in at http://dx.doi.org/10.1214/12-AAP914 the Annals of
Applied Probability (http://www.imstat.org/aap/) by the Institute of
Mathematical Statistics (http://www.imstat.org)

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## A note on arbitrage, approximate arbitrage and the fundamental theorem of asset pricing

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 27/11/2013
Português

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We provide a critical analysis of the proof of the fundamental theorem of
asset pricing given in the paper "Arbitrage and approximate arbitrage: the
fundamental theorem of asset pricing" by B. Wong and C.C. Heyde (Stochastics,
2010) in the context of incomplete It\^o-process models. We show that their
approach can only work in the known case of a complete financial market model
and give an explicit counterexample.; Comment: 10 pages

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## Finitely additive probabilities and the Fundamental Theorem of Asset Pricing

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 29/11/2009
Português

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This work aims at a deeper understanding of the mathematical implications of
the economically-sound condition of absence of arbitrages of the first kind in
a financial market. In the spirit of the Fundamental Theorem of Asset Pricing
(FTAP), it is shown here that absence of arbitrages of the first kind in the
market is equivalent to the existence of a finitely additive probability,
weakly equivalent to the original and only locally countably additive, under
which the discounted wealth processes become "local martingales". The
aforementioned result is then used to obtain an independent proof of the FTAP
of Delbaen and Schachermayer. Finally, an elementary and short treatment of the
previous discussion is presented for the case of continuous-path semimartingale
asset-price processes.; Comment: 14 pages. Dedicated to Prof. Eckhard Platen, on the occasion of his
60th birthday. This is the 2nd part of what comprised the older arxiv
submission arXiv:0904.1798

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## Generalized asset pricing: Expected Downside Risk-Based Equilibrium Modelling

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 06/12/2015
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We introduce an equilibrium asset pricing model, which we build on the
relationship between a novel risk measure, the Expected Downside Risk (EDR) and
the expected return. On the one hand, our proposed risk measure uses a
nonparametric approach that allows us to get rid of any assumption on the
distribution of returns. On the other hand, our asset pricing model is based on
loss-averse investors of Prospect Theory, through which we implement the
risk-seeking behaviour of investors in a dynamic setting. By including EDR in
our proposed model unrealistic assumptions of commonly used equilibrium models
- such as the exclusion of risk-seeking or price-maker investors and the
assumption of unlimited leverage opportunity for a unique interest rate - can
be omitted. Therefore, we argue that based on more realistic assumptions our
model is able to describe equilibrium expected returns with higher accuracy,
which we support by empirical evidence as well.; Comment: 55 pages, 15 figures, 1 table, 3 appandices, Econ. Model. (2015)

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## Implicit transaction costs and the fundamental theorems of asset pricing

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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This paper studies arbitrage pricing theory in ?financial markets with
transaction costs. We extend the existing theory to include the more realistic
possibility that the price at which the investors trade is dependent on the
traded volume. The investors in the market always buy at the ask and sell at
the bid price. Transaction costs are composed of three terms, one is able to
capture the implicit transaction costs, the second the price impact and the
last the bid-ask spread impact. Moreover, a new definition of a self-financing
portfolio is obtained. The self-financing condition suggests that continuous
trading is possible, but is restricted to predictable trading strategies having
c?adl?ag (right-continuous with left limits) and c?agl?ad (left-continuous with
right limits) paths of bounded quadratic variation and of ?finitely many jumps.
That is, c?adl?ag and c?agl?ad predictable trading strategies of infinite
variation, with?finitely many jumps and of ?finite quadratic variation are
allowed in our setting. Restricting ourselves to c?agl?ad predictable trading
strategies, we show that the existence of an equivalent probability measure is
equivalent to the absence of arbitrage opportunities, so that the first
fundamental theorem of asset pricing (FFTAP) holds. It is also shown that...

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## Ambiguous volatility and asset pricing in continuous time

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 19/01/2013
Português

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This paper formulates a model of utility for a continuous time framework that
captures the decision-maker's concern with ambiguity about both volatility and
drift. Corresponding extensions of some basic results in asset pricing theory
are presented. First, we derive arbitrage-free pricing rules based on hedging
arguments. Ambiguous volatility implies market incompleteness that rules out
perfect hedging. Consequently, hedging arguments determine prices only up to
intervals. However, sharper predictions can be obtained by assuming preference
maximization and equilibrium. Thus we apply the model of utility to a
representative agent endowment economy to study equilibrium asset returns. A
version of the C-CAPM is derived and the effects of ambiguous volatility are
described.

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## Asset pricing with random information flow

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 20/09/2010
Português

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In the information-based approach to asset pricing the market filtration is
modelled explicitly as a superposition of signals concerning relevant market
factors and independent noise. The rate at which the signal is revealed to the
market then determines the overall magnitude of asset volatility. By letting
this information flow rate random, we obtain an elementary stochastic
volatility model within the information-based approach. Such an extension is
economically justified on account of the fact that in real markets information
flow rates are rarely measurable. Effects of having a random information flow
rate is investigated in detail in the context of a simple model setup.
Specifically, the price process of the asset is derived, and its characteristic
behaviours are revealed via simulation studies. The price of a European-style
option is worked out, showing that the model has a sufficient flexibility to
fit volatility surface. As an extension of the random information flow model,
price manipulation is considered. A simple model is used to show how the
skewness of the manipulated and unmanipulated price processes take opposite
signature.; Comment: 19 pages, 8 figures

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## A simplified Capital Asset Pricing Model

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Publicado em 11/11/2011
Português

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We consider a Black-Scholes market in which a number of stocks and an index
are traded. The simplified Capital Asset Pricing Model is the conjunction of
the usual Capital Asset Pricing Model, or CAPM, and the statement that the
appreciation rate of the index is equal to its squared volatility plus the
interest rate. (The mathematical statement of the conjunction is simpler than
that of the usual CAPM.) Our main result is that either we can outperform the
index or the simplified CAPM holds.; Comment: 6 pages

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## Martingale selection problem and asset pricing in finite discrete time

Fonte: Universidade Cornell
Publicador: Universidade Cornell

Tipo: Artigo de Revista Científica

Português

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Given a set-valued stochastic process $(V_t)_{t=0}^T$, we say that the
martingale selection problem is solvable if there exists an adapted sequence of
selectors $\xi_t\in V_t$, admitting an equivalent martingale measure. The aim
of this note is to underline the connection between this problem and the
problems of asset pricing in general discrete-time market models with portfolio
constraints and transaction costs. For the case of relatively open convex sets
$V_t(\omega)$ we present effective necessary and sufficient conditions for the
solvability of a suitably generalized martingale selection problem. We show
that this result allows to obtain computationally feasible formulas for the
price bounds of contingent claims. For the case of currency markets we also
give a comment on the first fundamental theorem of asset pricing.; Comment: 6 pages

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