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Cost minimization and asset pricing

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  • Chambers, Robert G.
  • Quiggin, John

Abstract

A cost-based approach to asset-pricing equilibrium relationships is developed. A cost function induces a stochastic discount factor (pricing kernel) that is a function of random output, prices, and capital stockt. By eliminating opportunities for arbitrage between financial markets and the production technology, firms minimize the current cost of future consumption. The first-order conditions for this cost minimization problem generate the stochastic discount factor. The cost-based approach is dual in nature and determines state-claim prices as the current-period marginal cost of increasing future stochastic output. A cost-based pricing kernel is estimated using annual time-series data on macroeconomic variables and returns data

Suggested Citation

  • Chambers, Robert G. & Quiggin, John, 2005. "Cost minimization and asset pricing," Risk and Sustainable Management Group Working Papers 151170, University of Queensland, School of Economics.
    • Handle: RePEc:ags:uqsers:151170
    DOI: 10.22004/ag.econ.151170
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    References listed on IDEAS

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    Cited by:

    1. Adamson, David & Mallawaarachchi, Thilak & Quiggin, John C., 2007. "Water use and salinity in the Murray–Darling Basin: A state-contingent model," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 51(3), pages 1-19.
    2. John Quiggin & Robert G. Chambers, 2006. "The state-contingent approach to production under uncertainty ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 50(2), pages 153-169, June.

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    More about this item

    Keywords

    Financial Economics;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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