Most tests of asset pricing models address only the pricing predictions – perhaps because the portfolio choice predictions are obviously wrong. But how can asset-pricing theory be right if the portfolio choice theory on which it rests is wrong? This work builds and observes experimental markets in which risky and riskless assets are traded. Risk aversion is a robust phenomenon in experimental s...

Modern portfolio theory is based on the relationship between risk and return and in this paper, specific uncertainty conditions are introduced as ambiguity which affects the asset pricing. Also, the relationship between risk, ambiguity and return is examined. First, ambiguity is estimated by the means of three-variable and main component method, trading volume, ask-bid spread, error of earnings...

In this paper, installment options on the underlying asset which evolves according to Black-Scholes model and pays constant dividend to its owner will be considered. Applying arbitrage pricing theory, the non-homogeneous parabolic partial differential equation governing the value of installment option is derived. Then, penalty method is used to value the European continuous installment call opt...

The relationship between trading volume and securities prices is a complex one which, when understood properly, can lead to many insights in portfolio theory. Over the past forty years, much work has been done trying to understand this relationship. In this document, we will attempt to introduce and discuss some of these papers. First, we introduce basic topics of finance theory, such as the Ca...

We generalize the Arbitrage Pricing Theory (APT) to include the contribution of virtual arbitrage opportunities. We model the arbitrage return by a stochastic process. The latter is incorporated in the APT framework to calculate the correction to the APT due to the virtual arbitrage opportunities. The resulting relations reduce to the APT for an infinitely fast market reaction or in the case wh...

Concepts of constant absolute risk aversion and constant relative risk aversion have proved useful in the analysis of choice under uncertainty, but are quite restrictive, particularly when they are imposed jointly. A generalization of constant risk aversion, referred to as invariant risk aversion is developed. Invariant risk aversion is closely related to the possibility of representing prefere...

Pricing theory is concerned with determining a realistic market-related price of an asset that is not yet marketed. There are several approaches to this issue, most of which use systems theory concepts, such as optimization, dynamic recursion, probability, stochastic process, and control. Pricing theory has therefore benefited greatly from systems theory. Systems theory can also benefit from pr...

This paper investigates Euler equations involving security prices and household-level consumption data. It provides a useful complement to many existing studies of consumptionbased asset pricing models that use a representative-agent framework, because the Euler equations under investigation hold even if markets are incomplete. It also provides a useful complement to simulation-based studies of...

capital asset pricing, as one of the basic theories in finance and investment area, develop a model for estimation of expected rate of return and equity cost of capital. this model has many applications in the field of finance. one of anomalies in the capital asset pricing model is the value premium that its proponents believe this risk premium is compensation for a risk not mentioned in origin...