Introduction to asset pricing theory the theory of asset pricing is concerned with explaining and determining prices of. Financial asset pricing theory offers a comprehensive overview of the classic and the current. First, we assume that managers derive private benefits from operating a firm in addition to the value of any ownership share of the firm they have. In practice, this assumption is unreasonable, so the capital asset pricing model is largely of theoretical value. Financial asset pricing theory, 20, 585 pages, claus munk. Download it once and read it on your kindle device, pc, phones or tablets.
Use features like bookmarks, note taking and highlighting while reading asset pricing theory princeton series in finance. Lecture notes in macroeconomics asset pricing asset pricing sits on the border of two areas of macro. Asset pricing, professor doron avramov, finance department, hebrew university of jerusalem, israel for example, the market model is a statistical model with being represented by excess return on the market portfolio. Asset pricing theory princeton serie s in finance kindle edition by costis skiadas. An asset pricing model intends to identify economic icapm or statistical apt common factors which are. Jul 17, 2015 beta is the building block of capm theory. On the other hand, the creation of assets is done through investment. In particular the course will consider the capm, arbitrage pricing and the apt, the consumption capm, martingale pricing theory, elementary interest rate. In case of a stock market, the inclination of a stock to accelerate with the market is called beta. Financial asset pricing theory cbs research portal. Here asset prices jointly satisfy the requirement that the quantities of each asset supplied and the quantities demanded must be equal at that price so called market clearing. Both the noarbitrage and the general equilibrium approaches of asset pricing theory are treated coherently within the general equilibrium framework.
Topics in asset pricing hebrew university of jerusalem. General equilibrium under convex portfolio constraints and. These dynamics, for which they provide empirical support, in conjunction with generalized recursive preferences, can explain key asset markets phenomena. Asset pricing is developed around the concept of a stateprice deflator which relates. This works because the model assumes that all investors agree on the beta and expected return of any asset. Thus asset pricing is an extension of consumption theory. Inherent to the stochastic modelling of financial markets is the often tacit. Claus munk financial asset pricing theory world of digitals. The best method for a firm to use depends on the buyer and the seller, their respective share situations, asset values, and debt liabilities. Asset pricing theory phd course the einaudi institute for. How do you ensure that managers act in shareholders interests. Asset pricing model financial definition of asset pricing model. The specific attribute of the market portfolio is that the weight on a stock is the fraction of that stocks market value. Ideal main textbook for courses where the required readings often consists of a long list of research articles with varying focus, notation, and writing style.
I wish to thank my thesis committee, mogens steffensen, claus munk, and nicole. Fundamental asset pricing theory derives asset prices via the maximization prob lem of a. My other research interests are in general asset pricing theory, the pricing of fixedincome securities, numerical methods in finance, and management compensation. Under general equilibrium theory prices are determined through market pricing by supply and demand. The reading from asset pricing lays out asset pricing theory in a careful way. Franklin allen abstract in standard asset pricing theory, investors are assumed to invest directly in financial markets. Comprehensive and unified presentation of modern asset pricing theory.
An overview of asset pricing models andreas krause university of bath school of management phone. Start studying chapter 7 capital asset pricing and arbitrage pricing theory. Jun 25, 2019 arbitrage pricing theory apt is a multifactor asset pricing model based on the idea that an assets returns can be predicted using the linear relationship between the assets expected return. The following examples are based on chapters 3, 6 and 8 in munk 20. In finance, arbitrage pricing theory apt is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factorspecific beta coefficient. Arbitrage pricing theory assumptions explained hrf. The key message of the model is that the expected excess return on a risky. An investor must decide how much to save and how much to consume, and what portfolio of assets to hold. His research has been published in academic journals such as journal of finance, journal of. Eugene fama is one of the worlds most cited economists in any eld. A special case meanvarianceanalysis 10 3 1 6 individualoptimality 1. Expected excess returns risk premia vary over time. It is considered to be an alternative to the capital asset pricing model as a method to explain the returns of portfolios or assets. From the findings on this additional factor, so called momentum, carhart 1997 develops a deeper analysis of this effect on empirical predictions, so to propose its inclusion as a fourth factor on the fama and french 1993, 1996 3factor model, yielding the wellknown 4factor asset pricing model.
Optimal consumption and portfoliochoice 20 6 2 12 3. How to build a merger model a basic overview of the key steps. It is interesting in itself to be able to model and understand the pricing mechanisms in the. Merger and acquisition play an important role in business landscape, and are often considered as mechanisms of a market economy to become more efficient and effective. His research interests cover empirical asset pricing and the economics of the asset pricing industry. Undoubtedly, the capital asset pricing model capm developed by sharpe 1964, lintner 1965, and mossin 1966 is the best known asset pricing model. Theory of asset pricing unifies the central tenets and techniques of asset valuation into a single, comprehensive resource that is ideal for the first phd course in asset pricing. Apr 02, 2009 our theory of mergers is able to reconcile both of these stylized facts.
The economics of the term structure of interest rates 419 12. The current status of the capital asset pricing model capm. Financial asset pricing theory offers a comprehensive overview of the classic and the current research in theoretical asset pricing. Asset pricing is developed around the concept of a stateprice deflator which relates the price of any asset to its future risky dividends and thus incorporates how to adjust for both time and risk in asset. An overview of asset pricing models university of bath. Essays on empirical asset pricing vaasan yliopisto. Asset pricing the authors model consumption and dividend growth rates as containing both a small longrun predictable component and fluctuating economic uncertainty consumption volatility. By claus munk financial asset pricing theory by claus munk financial asset pricing theory offers a comprehensive overview of the classic and the current research in theoretical asset pricing. Pdf the purpose of this paper is to give a comprehensive. The fame of the laureates extends far beyond nancial economics.
The focus in corporate finance is on agency problems. The asset prices we discuss would include prices of bonds and stocks, interest rates, exchange rates, and derivatives of all these underlying. Chapter 7 capital asset pricing and arbitrage pricing theory. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Finding ways to merge noarbitrage and absolute pricing is one of the most. Various aspects of these models still need to be explored and i am involved in several research projects doing so. The model can justify the equity premium, the risk. Individual preferences, utility theory,andriskaversion 10 3 1 6 2. In this chapter, we shall introduce the basic theory of asset pricing and portfolio management in the discrete time case. Asset pricing is developed around the concept of a stateprice deflator which relates the price of any asset to its future risky dividends and thus incorporates how to adjust for both time and risk in asset valuation. Ross introduction this is a biased report on the status of a paradigm, the meanvariance capital asset pricing model, the capm.
Accordingly, the capital asset pricing model predicts the equilibrium price of an asset. This course covers the theory of a competitive economy under uncertainty, asset pricing, optimal portfolio decisionmaking and the basic elements of corporate finance without frictions. Learn how mergers and acquisitions and deals are completed. When implemented correctly, it is the practice of being able to take a positive and. These notes simply cover the way i plan to discuss the material in class.
Division of the humanities and social sciences elementary asset pricing theory kc border. Building blocks of asset pricingmodels 28 9 3 16 3. A typical merger or acquisition deal is, however, a very timeconsuming, complicated process with many phases, involving many parties and built on a very complex structure. Request pdf on may 1, 20, claus munk and others published financial asset pricing theory find, read and cite all the research you need on researchgate. Karl ludwig keiber, jonathan lewellen, claus munk, sergey mityakov, beat naef. Claus munk holds a phd in economics 1997 and an msc in. Each method of funding a merger or acquisition comes with its own hidden fees, commitments, and risks, and it is the buyers and sellers responsibility to practice due diligence during a transaction. The market portfolio the market portfolio, m, as any other portfolio, is described by portfolio weights. Thebasicsofoptionpricing 20 6 2 12 individualoptimality 1. Second, we assume that there is a regime shift that creates potential synergies. The main task of asset pricing model can be seen as the way to evaluate the. The cost and benefit analysis of the mergers and acquisitions affect the decision by the managers and the shareholders of whether to take up a specific merger and acquisition. Pdf financial markets and investments francesco cocozza.
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