Three Remarks On Asset Pricing

Olkhov, Victor (2021): Three Remarks On Asset Pricing.

Abstract

This paper considers the theoretical framework of the consumption-based asset-pricing model and derives successive approximations of the modified basic pricing equation using the Taylor series expansions of the investor’s utility function during the averaging time interval. For linear and quadratic Taylor approximations, we derive new expressions for the mean asset price, mean payoff, volatility, skewness, and the amount of an asset that delivers maximum to the investor’s utility. We introduce a new market-based approach to price probability determined by statistical moments of market trade values and volumes. We show that market-based price probability results in zero correlations between the time series of the n-th power of price pn and trade volume Un but doesn’t cause statistical independence. We derive a correlation between the time series of prices p and the squares of trade volumes U2. The market-based approach describes the impact of the size of the trade values and volumes on price statistical moments and probability. Predictions of the market-based price probability at horizon T should match forecasts of the statistical moments of the trade values and volumes at the same horizon T. Market-based price probability emphasizes direct dependence on the random properties of market trades.

• Item Type: MPRA Paper
• Language: English
• Keywords: asset pricing, volatility, price probability, market trades
• Subjects: C - Mathematical and Quantitative Methods > C0 - General > C02 - Mathematical Methods; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D53 - Financial Markets; G - Financial Economics > G1 - General Financial Markets > G10 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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