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 discrepancies between stock prices and fundamental values, the implications of constant discount rates, and the predictability of returns and dividends. The discussion covers the Grossman-Shiller plot, the Campbell-Shiller decomposition, and the derivation of the Black and Scholes formula.

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

Business

Finance: Investment management, Corporate finance

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.

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.

Efficient-market hypothesis

The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information. Because the EMH is formulated in terms of risk adjustment, it only makes testable predictions when coupled with a particular model of risk.

Investment fund

An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages include an ability to: hire professional investment managers, who may offer better returns and more adequate risk management; benefit from economies of scale, i.e., lower transaction costs; increase the asset diversification to reduce some unsystematic risk.

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