Economic Foundation of Asset Price Processes by Erik Paul Lüders

By Erik Paul Lüders

In this booklet the relation among the features of traders' personal tastes and expectancies and equilibrium asset expense approaches are analysed. it really is proven that declining elasticity of the pricing kernel may end up in confident serial correlation of brief time period asset returns and damaging serial correlation of long-term returns. Analytical asset fee methods also are derived. unlike the generally used "empirical" time-series versions those approaches don't lack a legitimate monetary starting place. in addition, unlike the preferred Ornstein Uhlenbeck method and the consistent Elasticity of Variance version the proposed stochastic methods are in keeping with a classical consultant investor economy.

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L" The pri cing kern el is restrict ed to two alte rnative specifications: i ) a relatively restrictive pricing kern el with constant elasticity and ii ) a relati vely flexible polynomial 16 See also Forn ar i and Mele [69) for a relat ed approach . However , they analyze futures written on Italian govern ment b onds. 1 Empirical Lit erature 33 approximation. e, the pr icing kernel is not monotonically decreasing. In terms of a represent ative investor this implies locally increasing marginal utility.

From the CAPM to the intertemporal behaviour of asset prices Any survey on asset pricing starts with the seminal Capital Asset Pricing Model (CAPM) developed by Lintner [125], Mossin [144] and Sharpe [174]. 1) . P" However, the CAPM is a one-period model and therefore not suited to explain asset prices in an intertemporal context. In the 70's and the 80's, articles discussed conditions under which a sequence of one-period models would be equivalent to an intertemporal model (see for example Bhattacharya [12] and Constantinides [43], [44]).

The empirical results ar e still very cont roversial, especially for methodological reasons. However , t hese st udies point out that it might be possible to use information eit her on past ret urns or other explanato ry variables as the book-to-market ratio to pr edict future asse t returns. This is in contrast to the assumption th at asset pri ces are governe d by a geometric Br ownian motion. Finally, also th e empirical pricing kernels are at odds with t he assumption that asset pri ces ar e governe d by a geometric Br owni an moti on.

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