The branch of Finance that studies and models how specific assets (such as options, bonds and stocks) are priced.
Questions tagged [asset-pricing]
174 questions
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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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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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Why are asset pricing models equilibrium models?
I have several times heard scholars refer to asset pricing models (such as the CAPM) as a type of equilibrium model. Why exactly is this the case? Does this simply mean that equilibrium is a necessary condition we need to accept for the model…
Constantin
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Markets that are linked to options prices
I recently went through a serious of lectures on economics and markets, and I was surprised by the lectures on options. The lecturer, said that the future prices of certain commodities like rice (food) could be closely estimated with option prices…
Kavi Vaidya
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4
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expected rate of return vs required rate of return in asset pricing
From Wikipedia, I read that "expected rate of returns" have two different meanings:
1: The expected return (or expected gain) on a financial investment is the expected value of its return (of the profit on the investment). The expected rate of…
Enk9456
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4
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Arbitrage Pricing Theory (APT), orthogonal factors
Why in the Arbitrage Pricing Theory (APT), one of the assumptions is that the factors has to be orthonogal? what if not?
jtomasrl
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Gaussian Affine Model and CAPM
When I assume an one-factor Gaussian term structure model such as the Vasicek model
$dr_t = \kappa(\mu - r_t)dt + \sigma dW_t$
and specify a constant market price of risk of $dW$ to be $\lambda_t = \lambda_y$ a constant, use the usual change of…
steveya
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Pricing of a call option in a one period binomial model
You are given a 5% call option worth \$2.66. The strike price, k is $41.00. S(0)=40, Sd= 35 (i.e the lower price of the stock at t=1) find Su (i.e the high price of the stock at t=1).
How would this be done? I know Cu= Su-\$41. C(0)=\$2.66 and I…
user2034
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2
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implied volatility, how to get parameters?
I understand how to calculate volatility and how to calculate call or put price.
However I don't understand something about input parameters.
For an example.
enter link description here
At the moment I am writing this post, implied volatility for…
Dindi
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What is the intuition behind projecting stochastic discount factor into the vector space spanned by the payoff vectors?
It makes sense to stochastic discount factor as a function of impatience and marginal utility of consumption, but what is the rationale to project it into the vector space spanned by the payoff vectors?
user1559897
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Risk-free borrowing as an assumption for CAPM
In a presentation of CAPM, I have found an assumption that actors can borrow risk-free. If the borrowed money is to be used for investing in shares (which is a risky investment), it makes little sense to me that any lender would be willing to lend…
Richard Hardy
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Should asset prices be always normalized by M2
When economists look at the financial asset prices, do they adjust them by something like M2 in order to judge how valued something is compared to the previous historic periods? It seems like otherwise one is looking at a non-normalized version of…
spacemonkey
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Can an In the Money Put Option's price $>$ its Strike Price?
The screenshot below suggests thatan ITM put option's price can't overstep its strike price? Why or why not?
user4020
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vote
2 answers
If a call may expire OTM, why won't a \$1 increase in the underlying's price necessarily increase the call's price by \$1?
Zvi Bodie, Alex Kane, Alan J. Marcus. Investments (2018 11 edn). p 723 scanned.
Figure 21.9 verifies that the slope of the call option valuation function is less than 1.0,
approaching 1.0 only as the stock price becomes much greater than…
user4020
1
vote
1 answer
Ex-dividend (Asset Pricing)
I am reading some lecture notes on asset pricing, and they use the term "ex-dividend" price of an asset.
I googled and found that ex-dividend means the time between announcement and payment of a dividend.
So, what does it mean by ex-dividend price?…
bluesky23
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