An overview of asset pricing models university of bath bath. This paper describes a productionbased asset pricing model. Valuation risk and asset pricing rui albuquerque,martineichenbaum,andsergiorebelo december 2012 abstract standard representativeagent models have di. A simple consumptionbased asset pricing model and the cross.
Bibliography includes bibliographical references and index. Risk finance and asset pricing presents a new direction in financial engineering education that combines reality and theory so that risk finance might again work as intended. These features are shared with structural models of corporate debt valuation, such as leland 1994, and with in. Valuation risk and asset pricing rui albuquerque, martin s. The capital asset pricing model capm is an example of an equilibrium model in which asset prices are related to the exogenous data, the tastes and endowments of investors although, as we shall see below, the capm is often presented as a relative pricing model. Equity premium puzzle, hansensingletonstyle rejection of asset pricing models, etc.
According to our estimates, valuation risk is a much more important determinant of asset returns than conventional risk. This is obvious when the puzzle refers to the mean of. Productionbased measures of risk for asset pricing by. Nonseparable preferences describe households concern with composition risk, that is.
We propose a simple theory of asset pricing in which demand shocks play a central role. Risk measures in quantitative finance by sovan mitra abstract this paper was presented and written for two seminars. Empirical evidence based on crosssectional tests is consistent with liquidity risk being priced. This is obvious when the puzzle refers to the mean of a return.
In this chapter, we look at how risk measures have evolved over time, from a fatalistic acceptance of bad outcomes to probabilistic measures that allow us. This paper discusses the dualbeta model, which separately accounts for these two types of risk and provides an. Asset pricing, risk, and crises article pdf available in quantitative finance 142 february 2014 with 1,267 reads how we measure reads. Risk management is a crucial process used to make investment decisions. Innovation, growth and asset prices howard kung lukas schmidy april 2012z abstract asset prices re ect anticipations of future growth. However, the reconciliation of asset markets with aggregate quantities has proved to be a challenge for dsge models. Asset pricing with liquidity risk faculty and research. Yaron 20 show that risk in the realized volatility of industrial production growth also bears.
Section 2 presents the productionbased asset pricing model. These models endogenize consumption and cash ows and o er a deeper understanding of the links between stock prices and the real economy. Background knowledge expected utility theory stochastic dynamic programming asset pricing example 2. Supplementary material for productionbased measures of. Although the exact specification of the marginal rate of transformation in proposition 1 is new, its specification is closely related to other popular empirical macrofactor asset pricing models such as cochrane 1996 and li et. Rf, is described by the sensitivities of its returns. A brief overview of this parallel development should be useful. Our program is flexible enough to utilize any new applicant score, and it incorporates your policies, procedures and lending strategies for maximum results. By learning about and using these tools, crop and livestock producers can build the confidence needed to deal with risk and exciting opportunities of the future. Further, if a securitys liquidity is persistent, a shock to its illiquidity results in low contemporaneous returns and high predicted future returns. An asset based approach is a type of business valuation that focuses on a companys net asset value nav, or the fairmarket value of its total assets minus its total. The garbagebased model also implies a riskfree rate that, while still high, is an order of magnitude lower than that under any other consumption measure.
Mar 25, 2019 risk management is a crucial process used to make investment decisions. Capital asset pricing model capm is used to price the risk of an asset or a. We present evidence for the three predictions of our model, and demonstrate the significance of labor hiring to understand the dynamic nature of discount rates and. A longshort portfolio constructed from firms with low and high asset collateralizability generates an average excess return of around 7. Empirically, we nd substantial evidence for innovationdriven lowfrequency movements in aggregate growth rates and asset market valuations. A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation. Asset pricing standard representativeagent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. Productionbased measures of risk for asset pricing core. Both of them are based on the efficient market hypothesis, and are. Productionbased asset pricing, production under uncertainty.
Productionbased measures of risk for asset pricing, 2010, journal of monetary economics, 572, 146163. If you accept the argument that risk matters and that it affects how managers and investors make decisions, it follows logically that measuring risk is a critical first step towards managing it. This fact underlies many important asset pricing puzzles. Consumption and asset pricing yinchi wangs webpage. Acharyaa,b,lassehejepedersenb,c,d, alondon business school, regents park, london, nw1 4sa, uk bcenter for economic policy research, uk cstern school of business, new york university, 44 west fourth street, suite 9190, new york 10012, usa dnational bureau of economic research, usa. Based on a novel measure of asset collateralizability, we provide empirical evidence that supports the above prediction. The capital asset pricing model is an equilibrium model that measures the relationship between risk and expected return of an asset based on the assets sensitivity to movements in the overall stock market. An empirical investigation, page 2 introduction the capital asset pricing model capm and the arbitrage pricing theory apt have emerged as two models that have tried to scientifically measure the potential for assets to generate a return or a loss. Productionbased asset pricing and the crosssection of returns. Figures xiiitables xvpreface xviipart i static portfolio choice and asset pricing1 choice under uncertainty 31.
Our model has an exogenous pricing kernel and its results are driven by the existence of a real option. I develop a novel procedure to measure the marginal rates of transformation in practice from industry output and price data. An assetbased approach is a type of business valuation that focuses on a companys net asset value nav, or the fairmarket value of its total assets minus its total. And for measuring business risk, there can be used three types of methods, as follows. The process involves identifying and analyzing the amount of risk involved in an investment, and either accepting that risk. Tapiero is the topfer distinguished professor of financial engineering and technology management at the new york university polytechnic institute. Risk attribution and portfolio performance measurementan. Hou, xue, and zhang 2015 measure investmenttocapital, ia, as the. We show that valuation risk is an increasing function of an assets maturity.
Productionbased measures of risk for asset pricing article in journal of monetary economics 572. We show that our dcapm accounts for the level and dispersion of risk premia across booktomarket and size sorted portfolios, and that. Pdf supplementary material for productionbased measures. Historically speaking, the earliest asset pricing models made relatively simple predictions about what it means for a benchmark to be oe to a managed portfolio. Although the risk measure of beta in the capital asset pricing model seems to survive this major deciency, it su. Measuring risk and risk aversion june 20, 2006 asset pricing. The marginal rate of transformation implies a novel macrofactor asset pricing model that does a reasonable job explaining the crosssectional variation in average stock returns with. Using a flexible representation of firms production technology, producers ability to transform output across states of nature is estimated to be high, in contrast with what is typically assumed in standard aggregate representations of firms production technology. High estimates of risk aversion, correspondingly large amounts that agents would pay for early resolution of uncertainty in lrr models. In a joint pricing test using garbage, a riskaversion coef.
Productionbased measures of risk for asset pricing frederico beloy december 21, 2009 abstract a stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation inferred from producers rstorder conditions. I am very grateful to the members of my dissertation committee, john cochrane chair, john heaton, monika piazzesi, and pietro veronesi for many helpful discussions. Measuring risk structure using the capital asset pricing model 229 which can be, according to this author, identi. The marginal rate of transformation implies a novel macrofactor asset pricing model. This fact underlies many important assetpricing puzzles. Disaster risk and its implications for asset pricing.
Frederico, productionbased measures of risk for asset pricing september 3, 2010. Productionbased measures of risk for asset pricing by frederico. A pure productionbased asset pricing model wharton finance. Productionbased measures of risk for asset pricing. The process involves identifying and analyzing the amount of risk involved. The target audience is therefore a cross section of academics and industry professionals. Mar 29, 2020 production based measures of risk for asset pricing, 2010, journal of monetary economics, 572, 146163. Incorporating downside risk in the buildup method abstract capital asset pricing model capm suggests that an investors cost of equity capital is determined by beta, a measure of systematic risk based on how returns comove with the overall market. Disaster risk premia most asset pricing puzzles, in one way or another, arise from a difference between a modeled and an observed risk premium the expected return on a risky asset above a riskless asset. Predictability and the term structure of risk week 1. Productionbased asset pricing production under uncertainty crosssectional. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals. Pdf productionbased measures of risk for asset pricing.
397 26 302 170 629 1279 999 885 1509 458 603 650 152 1077 1268 326 1094 821 979 1300 1026 1256 169 1070 30 380 556 1247 12 1203 134