/
Economics 434: The Theory of Financial Markets Economics 434: The Theory of Financial Markets

Economics 434: The Theory of Financial Markets - PowerPoint Presentation

mitsue-stanley
mitsue-stanley . @mitsue-stanley
Follow
416 views
Uploaded On 2017-09-11

Economics 434: The Theory of Financial Markets - PPT Presentation

Professor Burton Fall 2016 October 25 2016 CAPM Problems Unsatisfying statistical theory Broad criticism Rolls critique Lack of empirical validation Fama French Problems with diversification notion ID: 587026

october 2016 arbitrage capm 2016 october capm arbitrage theory return steve problems single factor pricing expected asset stock

Share:

Link:

Embed:

Download Presentation from below link

Download Presentation The PPT/PDF document "Economics 434: The Theory of Financial M..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.


Presentation Transcript

Slide1

Economics 434: The Theory of Financial Markets

Professor BurtonFall 2016

October 25, 2016Slide2

CAPM ProblemsUnsatisfying “statistical” theoryBroad criticismRoll’s critiqueLack of empirical validation (Fama-French)Problems with “diversification” notion

Data problems

October 25, 2016Slide3

Which Way to Go from CAPMArbitrage Pricing Theory, 1977, Steve RossFinite State Version of CAPMOctober 25, 2016Slide4

Arbitrage Pricing TheoryDeveloped by Steve Ross, 1976Uses “No-Arbitrage” AssumptionDesigned to provide “economic” variables to the determination of asset pricingAvoids the “single risky asset portfolio” problem

October 25, 2016Slide5

The Starting Point of APTOctober 25, 2016

+

+ … +

 

R

i

is the return in a single period for stock i

 

Is the expected return of stock i

 

is the “unanticipated” change in factor iSlide6

After a bit of linear algebra and taking a limit of arbitrage portfolios that increase in sizeOctober 25, 2016

+ …

 

What is

?

 

= E

 

The expected excess return attributable to a

beta of one exposure to factor iSlide7

So, What are the Economic FactorsAccording to Richard Roll & Steve RossInflationIndustrial productionRisk premiums (credit spreads)Slope of the term structure of interest rates

October 25, 2016Slide8

October 25, 2016