Three Remarks On Asset Pricing

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

Abstract

We consider the consumption-based asset-pricing model, derive a modified basic pricing equation, and present its successive approximations using the Taylor series expansions of the investor’s utility during the averaging time interval. For linear and quadratic Taylor approximations, we derive new expressions for the mean price, mean payoff, volatility, skewness, and the asset’s amount that define the maximum of the investor’s utility. We discuss the market-based origin of price probability. We use volume weighted average price (VWAP) as a market-based average price and introduce market-based price volatility. The use of VWAP results in zero correlations between the price p and trade volume U. We derive a correlation between price p and squares of trade volume U2 and between squares of price p2 and volume U2. To predict market-based price volatility, one should forecast the volatilities and correlations of market trade values and volumes at the same horizon T.

• 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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