Economic Foundation of Asset Price Processes: With 1 Table

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Springer Science & Business Media, Feb 3, 2004 - Business & Economics - 121 pages
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In this book the relation between the characteristics of investors' preferences and expectations and equilibrium asset price processes are analysed. It is shown that declining elasticity of the pricing kernel can lead to positive serial correlation of short term asset returns and negative serial correlation of long term returns. Analytical asset price processes are also derived. In contrast to the widely used "empirical" time-series models these processes do not lack a sound economic foundation. Moreover, in contrast to the popular Ornstein Uhlenbeck process and the Constant Elasticity of Variance model the proposed stochastic processes are consistent with a classical representative investor economy.

 

 

 

 

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Contents

Introduction
1
ArbitrageFree Markets and the Pricing Kernel
5
22 The Representative Agent Economy
10
23 Summary of Chapter 2
13
The Information Process
15
31 Characterization of the Economy
16
32 Complete Information and Constant Coefficients of the Book Value Process
17
33 Complete Information and Random Coefficients of the Book Value Process
19
Analytical Asset Price Processes
65
612 Example
67
62 HARAPreferences
71
621 The Standard Information Process
72
622 Displaced Diffusion
74
623 Truncated Displaced Diffusion
78
63 Summary of Chapter 6
80
Asset Returns Given Stochastic Volatility of the Information Process
81

332 Stochastic Volatility of the Book Value Process
20
34 Unknown Drift of the Book Value Process
21
35 Summary of Chapter 3
24
Literature Review
25
41 Empirical Literature
26
412 Option Prices
31
413 Summary
34
42 Theoretical Literature
35
422 Constructive Asset Pricing Models
42
423 Summary
47
43 Summary of Chapter 4
48
Asset Returns with NonConstant Elasticity of the Pricing Kernel
49
52 Implications for Asset Returns in DiscreteTime
54
522 TimeSeries Properties of Asset Returns
56
53 The Explanatory Power of Multiples
59
54 Summary of Chapter 5
62
72 Summary of Chapter 7
86
Summary
87
Appendix
89
A3 Technical Discussion of Viability in TwoFactor Models
90
A4 Proof of Lemma 1
93
A5 Proof of Corollary 1
94
A6 Proof of Proposition 4
95
A7 Derivation of Equation 63
96
A8 Proof of Proposition 8
97
A9 Derivation of Equation 617
98
A10 Proof of Corollary 2
99
A11 Proof of Proposition 9
100
Appendix Figures
103
References
113
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