Economic Foundation of Asset Price Processes [Paperback]

In this book the relation between the characteristics of investors' preferences and expectations and equilibrium asset price processes are analysed. It is shown that declining elasticity of the pricing kernel can lead to positive serial correlation of short term asset returns and negative serial correlation of long term returns. Analytical asset price processes are also derived. In contrast to the widely used empirical time-series models these processes do not lack a sound economic foundation. Moreover, in contrast to the popular Ornstein Uhlenbeck process and the Constant Elasticity of Variance model the proposed stochastic processes are consistent with a classical representative investor economy.

In this book the relation between the characteristics of investors' preferences and expectations and equilibrium asset price processes are analysed. It is shown that declining elasticity of the pricing kernel can lead to positive serial correlation of short term asset returns and negative serial correlation of long term returns. Analytical asset price processes are also derived. In contrast to the widely used empirical time-series models these processes do not lack a sound economic foundation. Moreover, in contrast to the popular Ornstein Uhlenbeck process and the Constant Elasticity of Variance model the proposed stochastic processes are consistent with a classical representative investor economy.

1 Introduction.- 2 Arbitrage-Free Markets and the Pricing Kernel.- 2.1 Implications of Arbitrage-Free Markets.- 2.2 The Representative Agent Economy.- 2.3 Summary of Chapter 2.- 3 The Information Process.- 3.1 Characterization of the Economy.- 3.2 Complete Information and Constant Coefficients of the Book Value Process.- 3.3 Complete Information and Random Coefficients of the Book Value Process.- 3.3.1 Random Drift of the Book Value Process.- 3.3.2 Stochastic Volatility of the Book Value Process.- 3.4 Unknown Drift of the Book Value Procel³%