Ser-Huang Poon's Asset pricing in discrete time: a complete markets approach PDF

By Ser-Huang Poon

ISBN-10: 0199271445

ISBN-13: 9780199271443

This ebook covers the pricing of resources, derivatives, and bonds in a discrete time, entire markets framework. It is based seriously at the life, in a whole marketplace, of a pricing kernel. it truly is essentially aimed toward complicated Masters and PhD scholars in finance. issues coated contain CAPM, non-marketable historical past hazards, eu kind contingent claims as in Black-Scholes and in instances the place threat impartial valuation courting doesn't exist, multi-period asset pricing lower than rational expectancies, ahead and futures contracts on resources and derivatives, and bond pricing lower than stochastic rates of interest. all of the proofs, together with a discrete time facts of the Libor marketplace version, are proven explicitly.

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Extra info for Asset pricing in discrete time: a complete markets approach

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We see that the claim is priced as if the world was risk neutral. 9) is referred to as a RNVR. 4 The Black–Scholes Price of a European Call Option In this section we apply the general expression for the price of the contingent claim paying g(xj) to the special case of a call option. A European-style call option, with strike price k has a payoff at time t+T: We now show that the price of this claim is given by the Black–Scholes formula. 9). , when xj < k. 11). 11) in this case using y = ln xj and a = ln k.

8. Assume that there are only three states of the world, i = 1,2,3. Write out the maximisation of expected utility problem for the investor. Show the first-order conditions for a maximum. This page intentionally left blank 2 Risk Aversion, Background Risk, and the Pricing Kernel We have seen in Chapter 1 that asset prices depend on the characteristics of the pricing kernel, φ(xm). In the simple case, where all investors are identical, we can model the pricing kernel using the utility function of the ‘representative investor’.

Also, except in the case of exponential utility, θ′(xm) < 0. The non-negativity of θ(xm) reflects the fact that the risk premium is also non-negative. Intuitively, θ′(xm)< 0 follows from the fact that 34 Risk Aversion, Background Risk, and the Pricing Kernel a given background risk has less effect at high income level than at low income level. Similarly, we would expect rich individuals to have a smaller precautionary premium than poor individuals. The shape of the precautionary premium for two levels of background risk is illustrated in Fig.

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Asset pricing in discrete time: a complete markets approach by Ser-Huang Poon

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