Projective system approach to the martingale characterization of the absence of arbitrage

The equivalence between the absence of arbitrage and the existence of an equivalent martingale measure fails when an infinite number of trading dates is considered. By enlarging the set of states of nature and the probability measure through a projective system of topological spaces and Radon measures, we characterize the absence of arbitrage when the time set is countable

Multifactor consumption based asset pricing model of the UK stock market: The US stock market as a wealth reference

Copyright @ 2011 University of BirminghamHere a multifactor model of UK stock returns is developed, replac- ingHere a multifactor model of UK stock returns is developed, replacing the conventional consumption habit reference by a relation that depends on US wealth. Two step Instrumental Variables and Generalized Method of Moments estimators are applied to reduce the impact of weak instruments. The standard errors are corrected for the generated regressor problem and the model is found to explain UK excess returns by UK consumption growth and expected US excess returns. Hence, controlling for nominal effects by subtracting a risk free rate and conditioning on real US excess returns provides an appealing explanation of the equity premium puzzle. US excess returns. Hence, controlling for nominal e¤ects by subtracting a risk free rate and conditioning on real US excess returns provides an appealing explanation of the equity premium puzzle

Optimal Asset Pricing

We describe an R package for determining the optimal price of an asset which is “perishable” in a certain sense, given the intensity of customer arrivals and a time-varying price sensitivity function which specifies the probability that a customer will purchase an asset offered at a given price at a given time. The package deals with the case of customers arriving in groups, with a probability distribution for the group size being specified. The methodology and software allow for both discrete and continuous pricing. The class of possible models for price sensitivity functions is very wide, and includes piecewise linear models. A mechanism for constructing piecewise linear price sensitivity functions is provided

Uji Empiris Model Asset Pricing Lima Faktor Fama-french Di Indonesia

The main purpose of this study is to evaluate and compare the performances of the Fama-French three- (FF3) and five-factor (FF5) models in the Indonesia stock market. This study also examines whether book-to-market factor (HML) is redundant in explaining the portfolio excess returns in Indonesia. This study employs asset pricing factor of the 2 x 3 sorts and excess returns of 25 Size-B/M, 25 Size-OP, dan 25 Size-Inv portfolios as dependent variables. This study employs Ordinary Least Square (OLS) with monthly time-series data from 2000 to 2015. Based on the average adjusted R2 from the two models, FF5 explains portfolio excess return variations better than FF3, although the profitability and investment factors only display weak effect on the excess returns. If we refer to Merton's (1973) zero-intercept criterion, the both models are not valid in Indonesia, because most intercepts are significant in each set of 25 portfolios. We also find that book-to-market factor is redundant in describing the variation of returns in Indonesia. The test of intercept difference between Indonesia and The US indicates that there are differences of abnormal return and market efficiency in both countries

Pricing Liquidity Risk with Heterogeneous Investment Horizons

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small

The implied equity risk premium - an evaluation of empirical methods

A new approach of estimating a forward-looking equity risk premium (ERP) is to calculate an implied risk premium using present value (PV) formulas. This paper compares implied risk premia obtained from different PV models and evaluates them by analyzing their underlying firm-specific cost-of-capital estimates. It is shown that specific versions of dividend discount models (DDM) and residual income models (RIM) lead to similar ERP estimates. However, cross-sectional regression tests of individual firm risk suggest that there are qualitative differences between both approaches. Expected firm risk obtained from the DDM is more in line with standard asset pricing models and performs better in predicting future stock returns than estimates from the RIM

Journal of Financial Economics

We propose a new method of testing asset pricing models that relies on quantities rather than just prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the risk model that is closest to the model that investors use in making their capital allocation decisions. Using our method, we assess the performance of the most commonly used asset pricing models in the literature

Solving asset pricing models with stochastic volatility

This paper provides a closed-form solution for the price-dividend ratio in a standard asset pricing model with stochastic volatility. The growth rate of the endowment is a first-order Gaussian autoregression, while the stochastic volatility innovations can be drawn from any distribution for which the moment-generating function exists. The solution is useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form. The closed-form solution reveals that, when using perturbation methods around the deterministic steady state, the approximate solution needs to be sixth-order accurate in order for the parameter capturing the conditional standard deviation of the stochastic volatility process to be present.PostprintPeer reviewe