Asset Pricing Lecture Notes

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1、AssetPricingLectureNotesApril2011SeungMoChoiSchoolofEconomicSciencesWashingtonStateUniversityContentsFundamentalEquationofAssetPricing2FundamentalEquationofAssetPricing:EmpiricalIssues17FundamentalEquationofAssetPricing:ContinuousTime28In‡ationRisk:Cash-In-AdvanceModel47TermStru

2、ctureofInterestRates66Cross-SectionofAssetReturns79DefaultsandPunishments86IssueswithPreferences99AlternativeApproachestoFinancialBehaviors104China’sStockMarkets1101S.Choi,WSUEconS502(Spring2011)FundamentalEquationofAssetPricingReferencesCochrane,J.H.,(2005),AssetPricing,Revise

3、dEdition,PrincetonUniversityPress,Princeton,NJ,Chapter1.Ljungqvist,L.,andT.J.Sargent(2004),RecursiveMacroeconomicTheory,2ndEdition,MITPress,Cambridge,MA,Chapters7-8.MainQuestion:Howarethepricesofassetsdetermined?———->govtsecurities,stocks,derivatives,housing,humancapital,allot

4、hersContents1.FundamentalEquation2.Interpretation:ComovementofConsumptionsandPayo¤s3.ER-Representation4.CAPMasaSpecialCase5.Arrow-DebreuMarket1.FundamentalEquationRepresentativeconsumer/investorEndowmenteconomy:Y0,Y1,Y2,...,Yt,...(inunitsofphysicalgoods)(stochastic)2Nostorage

5、.Butallowedtobuyorsellaspeci…cone-periodassetThisone-periodassetisbetweenperiods0and1.Itcanbeoneofanyassetsyoucanimagine(stocks,bonds,humancapital,...)+——————————-+Period0Period1PayP0ReceiveX1P0:priceoftheassetatperiod0(inunitsofphysicalgoods)X1:(stochastic)payo¤atperiod1(in

6、unitsofphysicalgoods)Theconsumerobservesatperiod0:Y0,P0,distributionofYt’sfort=1;2;:::,distributionofX1,anystochasticpropertiesofYt’sandX1Theconsumerdoesnotobserveatperiod0:RealizedvaluesofX1,Y1,Y2,...Theconsumerpurchasesaunitsofthisassetatperiod0.(Ifa<0,shesells.)Theconsume

7、rmaximizesatperiod0:"#X1tE0u(Ct);0<<1:t=0Subscript0emphasizesthatsheisatperiod0.(Thatis,Eisbasedonallrelevantinformationavailableatperiod0.)Constraints:C0=Y0aP0;C1=Y1+aX1;C2=Y2;:::Note:Thisisanendowmenteconomy.Weknowa=0sothatC0=Y0andC1=Y1.Thenwhyarewesolvingit?Wewantto…ndP0

8、whichclearsthemarket.Unconstrainedmaximization