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Equilibrium Asset Returns In Financial Markets

Author

Listed:
  • DILIP B. MADAN

    (Robert H. Smith School of Business, University of Maryland, College Park, 20742 MD, USA)

  • WIM SCHOUTENS

    (Department of Mathematics, K.U. Leuven, Leuven, Belgium)

Abstract

Return distributions in the class of pure jump limit laws are observed to reflect numerous asymmetries between the upward and downward motions of asset prices. The return distributions are modeled by self-decomposable parametric laws with all parameters continuously responding to each other. Fixed points of the response functions define equilibrium distributions. The equilibrium distributions that can arise in practice are constrained by the level of return acceptability they may attain. As a consequence, expected returns are equated to risk measured by the cost of purchasing the negative of the centered return. The asymmetries studied include differences in scale, speed, power variation, excitation and cross-excitation.

Suggested Citation

  • Dilip B. Madan & Wim Schoutens, 2019. "Equilibrium Asset Returns In Financial Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 22(02), pages 1-43, March.
    • Handle: RePEc:wsi:ijtafx:v:22:y:2019:i:02:n:s0219024918500632
    DOI: 10.1142/S0219024918500632
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    References listed on IDEAS

    as
    1. Dilip B. Madan & Peter P. Carr & Eric C. Chang, 1998. "The Variance Gamma Process and Option Pricing," Review of Finance, European Finance Association, vol. 2(1), pages 79-105.
    2. G. Bonanno & F. Lillo & R. N. Mantegna, 2001. "High-frequency cross-correlation in a set of stocks," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 96-104.
    3. Dilip B. Madan & Wim Schoutens & King Wang, 2017. "Measuring And Monitoring The Efficiency Of Markets," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 20(08), pages 1-32, December.
    4. Stephen A. Ross, 2013. "The Arbitrage Theory of Capital Asset Pricing," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 1, pages 11-30, World Scientific Publishing Co. Pte. Ltd..
    5. Madan, Dilip B & Seneta, Eugene, 1990. "The Variance Gamma (V.G.) Model for Share Market Returns," The Journal of Business, University of Chicago Press, vol. 63(4), pages 511-524, October.
    6. repec:dau:papers:123456789/1380 is not listed on IDEAS
    7. Peter Carr & Helyette Geman, 2002. "The Fine Structure of Asset Returns: An Empirical Investigation," The Journal of Business, University of Chicago Press, vol. 75(2), pages 305-332, April.
    8. Peter Carr & Dilip B. Madan, 2014. "Joint modeling of VIX and SPX options at a single and common maturity with risk management applications," IISE Transactions, Taylor & Francis Journals, vol. 46(11), pages 1125-1131, November.
    9. Dilip Madan & Martijn Pistorius & Mitja Stadje, 2013. "On dynamic spectral risk measures, a limit theorem and optimal portfolio allocation," Papers 1301.3531, arXiv.org, revised Apr 2017.
    10. D. Madan & M. Pistorius & M. Stadje, 2017. "On dynamic spectral risk measures, a limit theorem and optimal portfolio allocation," Finance and Stochastics, Springer, vol. 21(4), pages 1073-1102, October.
    11. Peter Carr & Hélyette Geman & Dilip B. Madan & Marc Yor, 2007. "Self‐Decomposability And Option Pricing," Mathematical Finance, Wiley Blackwell, vol. 17(1), pages 31-57, January.
    12. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    13. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
    14. Helyette Geman & C. Peter M. Dilip Y. Marc, 2007. "Self decomposability and option pricing," Post-Print halshs-00144193, HAL.
    15. Alexander Cherny & Dilip Madan, 2009. "New Measures for Performance Evaluation," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2371-2406, July.
    Full references (including those not matched with items on IDEAS)

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