IDEAS home Printed from https://ideas.repec.org/p/arx/papers/1103.3206.html
   My bibliography  Save this paper

Noise, risk premium, and bubble

Author

Listed:
  • Grzegorz Andruszkiewicz
  • Dorje C. Brody

Abstract

The existence of the pricing kernel is shown to imply the existence of an ambient information process that generates market filtration. This information process consists of a signal component concerning the value of the random variable X that can be interpreted as the timing of future cash demand, and an independent noise component. The conditional expectation of the signal, in particular, determines the market risk premium vector. An addition to the signal of any term that is independent of X, which generates a drift in the noise, is shown to change the drifts of price processes in the physical measure, without affecting the current asset price levels. Such a drift in the noise term can induce anomalous price dynamics, and can be seen to explain the mechanism of observed phenomena of equity premium and financial bubbles.

Suggested Citation

  • Grzegorz Andruszkiewicz & Dorje C. Brody, 2011. "Noise, risk premium, and bubble," Papers 1103.3206, arXiv.org.
  • Handle: RePEc:arx:papers:1103.3206
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/1103.3206
    File Function: Latest version
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:1103.3206. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators). General contact details of provider: http://arxiv.org/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.