Lecture

Asset Pricing: Excess Volatility Puzzle

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In course

FIN-609: Asset Pricing (2011 - 2024)

This course provides an overview of the theory of asset pricing and portfolio choice theory following historical developments in the field and putting emphasis on theoretical models that help our understanding of financial decision making and financial mar ...

Description

This lecture delves into the Excess Volatility Puzzle, exploring the absence of arbitrage in asset pricing and the implications of a stochastic discount factor on asset prices. The discussion covers the relationship between stock prices and future dividends, the predictability of returns versus dividends, and the Campbell-Shiller decomposition. The lecture also examines the impact of risk-aversion, habit formation, and heterogeneous agents on asset pricing models.

Instructor

Semyon Malamud

Teaching & PhD PhD Students Johannes Schwab, Onur Demiray, Giuseppe Matera Past EPFL PhD Students Rémy Praz, Evgeny Petrov, Yuan Zhang, Julien Arsène Blatt, Erik Hapnes, Teng Andrea Xu, Boris Kuznetsov Courses Big Data and Machine Learning for Financial Economics FIN-622 This class is an introduction to Machine Learning and High Dimensional Statistics in Finance. We start with purely empirical approach, focusing first on high dimensional regressions then moving to kernel methods and deep l

Official source

Ontological neighbourhood

Economics

Microeconomics: Financial economics

Related concepts (32)

Capital asset pricing model

In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. The model takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset.

Stock market

A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange, as well as stock that is only traded privately, such as shares of private companies which are sold to investors through equity crowdfunding platforms. Investment is usually made with an investment strategy in mind. The total market capitalization of all publicly traded securities worldwide rose from US$2.

Arbitrage pricing theory

In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, it is widely believed to be an improved alternative to its predecessor, the Capital Asset Pricing Model (CAPM). APT is founded upon the law of one price, which suggests that within an equilibrium market, rational investors will implement arbitrage such that the equilibrium price is eventually realised.

Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Fundamental theorem of asset pricing

The fundamental theorems of asset pricing (also: of arbitrage, of finance), in both financial economics and mathematical finance, provide necessary and sufficient conditions for a market to be arbitrage-free, and for a market to be complete. An arbitrage opportunity is a way of making money with no initial investment without any possibility of loss. Though arbitrage opportunities do exist briefly in real life, it has been said that any sensible market model must avoid this type of profit.

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