Economic Foundation of Asset Price Processes: With 1 TableIn 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" timeseries 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 