How do investors' expectations drive asset prices?



To derive the elasticity of the pricing kernel we compare this to

0,t  =  0,'■, о tτ,

Φ0,0 = 1

and yield


Kt

t


d-Λ (t,F )

Λ (t,F ) F ,


(8)


Equation (8) shows that in the economy under consideration the ratio of the
instantaneous volatility of the Girsanov-process, i.e. the market price of risk,
and the instantaneous volatility of the asset are equal to the elasticity of the
pricing kernel. In
T the following relation holds

∂ ,       4             ∂2     , 4

7Eh (T,Fτ)           '' (Ft)

κt    _dx 'x _  ∂x2       Z7

F                    F

^t ,,τ h τ F) T      θχu (ft)

thus the realtive risk aversion of the representative agent equals the elasticity
of the pricing kernel.7

In the remainder of this paper we will not rely on the existence of an
equilibrium. Instead we will only make the assumption that no arbitrage
possibilities exist and thus that the transformation of measure is given by
an appropriate Girsanov-functional. In this more general case, the pricing
kernel is not necessarily a deterministic function of the asset price.8

5 Derivation of Asset Price Processes

In this section we derive the forward price process of the asset in the market
defined in section 3. The point of start is

F — Ept,τFτσ {IuI 0 и ≤ t}) , 0 t T,

7For a more detailed derivation and discussion see for example Decamps, Lazrak [6]
and Franke, Stapleton, Subralimanyam [12]. For a derivation and discussion of the pricing
kernel in an equilibrium model not relying on the representative agent assumption see for
example Franke, Stapleton, Subrahmanyam [11].

8See for example Decamps, Lazrak [6].

12



More intriguing information

1. Managing Human Resources in Higher Education: The Implications of a Diversifying Workforce
2. The name is absent
3. Protocol for Past BP: a randomised controlled trial of different blood pressure targets for people with a history of stroke of transient ischaemic attack (TIA) in primary care
4. The name is absent
5. The name is absent
6. EMU: some unanswered questions
7. Analyse des verbraucherorientierten Qualitätsurteils mittels assoziativer Verfahren am Beispiel von Schweinefleisch und Kartoffeln
8. Cyclical Changes in Short-Run Earnings Mobility in Canada, 1982-1996
9. The name is absent
10. The name is absent
11. The name is absent
12. Place of Work and Place of Residence: Informal Hiring Networks and Labor Market Outcomes
13. EDUCATIONAL ACTIVITIES IN TENNESSEE ON WATER USE AND CONTROL - AGRICULTURAL PHASES
14. A Theoretical Growth Model for Ireland
15. Improvement of Access to Data Sets from the Official Statistics
16. Workforce or Workfare?
17. The InnoRegio-program: a new way to promote regional innovation networks - empirical results of the complementary research -
18. The name is absent
19. Are class size differences related to pupils’ educational progress and classroom processes? Findings from the Institute of Education Class Size Study of children aged 5-7 Years
20. Estimated Open Economy New Keynesian Phillips Curves for the G7