Economic Foundation of Asset Price Processes by Erik Paul Lüders

By Erik Paul Lüders

In this e-book the relation among the features of traders' personal tastes and expectancies and equilibrium asset fee techniques are analysed. it truly is proven that declining elasticity of the pricing kernel may end up in confident serial correlation of brief time period asset returns and unfavourable serial correlation of long-term returns. Analytical asset fee approaches also are derived. not like the commonly used "empirical" time-series types those approaches don't lack a legitimate monetary origin. in addition, unlike the preferred Ornstein Uhlenbeck approach and the consistent Elasticity of Variance version the proposed stochastic procedures are in keeping with a classical consultant investor economy.

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2 Theoretical Literature 35 fact that many ope n questi ons remain and especially meth odol ogical problems deserve further elaboration, this liter ature pr ovides evidence agai nst the geomet ric Browni an motion as a mod el for stock pri ces. However , t he above discussion is inconclusive with regard to t he true behaviour of asset returns . The following section provides a review of some t heoretical papers which are closely relat ed to t he new mod els which will be present ed in the following chapters.

Studies by Fisher [67], French and Roll [76] and Lo and MacKinlay [127] suggest that daily, weekly and monthly data are positiv ely auto corre late d at lag 1, but higher-ord er autocorrelat ions are negative. The studies of Fama and French [64] using regression-b ased tes ts and P ot erb a and Summers [159] using the vari an ce-ratio meth od ology ana lyze long-h orizon returns. They find strong negat ive serial corre latio n in 2- to lO-year returns. " Lewellen [122] has recently reexamined the qu estion whether long-horizon returns are negati vely a utocorrelated .

2} relies on the assumption that the information process is a diffusion process. With this assumption asset prices follow diffusion processes. Bick-HejLeland assume a representative investor whose preferences for terminal wealth (terminal consumption) can be represented by a stateindependent von Neumann-Morgenstern utility function . 2) is assumed to represent total wealth the representative investor must hold all of the asset in equilibrium. The investor's optimization problem is the same as in sect .

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