We show that the external habit-formation model economy of Campbell and Cochrane ~1999! can explain why the Capital Asset Pricing Model ~CAPM! and its extensions are better approximate asset pricing models than is the standard consumptionbased model. The model economy produces time-varying expected returns, tracked by the dividend–price ratio. Portfolio-based models capture some of this variati...

We shall study the paper by Cetin, Jarrow, Protter, [1]. This pa-per extends classical arbitrage pricing theory to include liquidity risk bystudying an economy where the security’s price depends on the trade size.Extended first and second fundamental theorems of asset pricing are in-vestigated. In an approximately complete market, derivative prices areshown to be the cla...

This is the first paper to test the asset pricing implication of leverage in a laboratory. We show that as theory predicts, leverage increases asset prices: when an asset can be used as collateral (i.e., when the asset can be bought on margin), its price goes up. This increase is significant, and quantitatively close to what theory predicts. However, important deviations from the theory arise i...

At the heart of any asset pricing theory is the view that a few pervasive factors are the dominant source of covariation among asset returns. While the existence of such systematic state variables is implied by comovements of asset prices, the theoretical asset pricing models do not (and perhaps cannot) provide an identity of these exogeneous economic forces. In light of this, empirical studies...

The main criterion in investment decisions is to maximize the investors utility. Traditional capital asset pricing models cannot be used when asset returns do not follow a normal distribution. For this reason, we use capital asset pricing model with independent and identically asymmetric power distributed (CAPM-IIAPD) and capital asset pricing model with asymmetric independent and identically a...

As emphasized by Giovannini and Labadie (1991), empirical regularities involving nominal interest rates, asset prices, and inflation should be ultimately determined by money. The role of money, however, is almost neglected, particularly in terms of asset-pricing literature. This paper attempts to investigate the role of money in asset pricing in Japan. Specifically, it compares the empirical pe...

We study risk-sharing equilibria with general convex costs on the agents' trading rates. For an infinite-horizon model linear state dynamics and exogenous volatilities, we prove that equilibrium returns mean-revert around their frictionless counterparts—the deviation has Ornstein-Uhlenbeck for quadratic whereas it follows a doubly-reflected Brownian motion if are proportional. More models arbit...

This article investigates the structure onpreferences required to derive Ross’s arbitrage pricing theory (APT). It is shown that only ordinalpreferences are required. In particular, the APT does not require that agents possess preferences representable as riskaverse expected utility functions. This characteristic of the APT is not shared by the standard equilibriumbased capital asset pricing mo...