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Cost Minimization and Asset Pricing

Author

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  • Robert G. Chambers

    (Dept of Agricultural and Resource Economics, University of Maryland, College Park)

  • John Quiggin

    (Department of Economics, University of Queensland A)

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
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Suggested Citation

  • Robert G. Chambers & John Quiggin, 2005. "Cost Minimization and Asset Pricing," Risk & Uncertainty Working Papers WP3R05, Risk and Sustainable Management Group, University of Queensland.
    • Handle: RePEc:rsm:riskun:r05_3
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    File URL: http://www.uq.edu.au/rsmg/WP/WPR05_3.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. 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.
    2. David Adamson & Thilak Mallawaarachchi & John Quiggin, 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 263-281, September.

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    More about this item

    JEL classification:

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

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