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How do investors' expectations drive asset prices?

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  • Lüders, Erik
  • Peisl, Bernhard

Abstract

Asset price processes are completely described by information processes and investors´ preferences. In this paper we derive the relationship between the process of investors´ expectations of the terminal stock price and asset prices in a general continous time pricing kernel framework. To derive the asset price process we make use of the modern technique of forward-backward stochastic differential equations. With this approach it is possible to show the driving factors for stochastic volatility of asset prices and to give theoretical arguments for empirically well documented facts. We show that stylized facts that look at first hand like financial market anomalies may be explained by an information process with stochastic volatility.

Suggested Citation

  • Lüders, Erik & Peisl, Bernhard, 2001. "How do investors' expectations drive asset prices?," ZEW Discussion Papers 01-15, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:5370
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    References listed on IDEAS

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    Cited by:

    1. Schröder, Michael & Lüders, Erik, 2004. "Modeling Asset Returns: A Comparison of Theoretical and Empirical Models," ZEW Discussion Papers 04-19 [rev.], ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Lüders, Erik, 2002. "Asset Prices and Alternative Characterizations of the Pricing Kernel," ZEW Discussion Papers 02-10, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

    More about this item

    Keywords

    backward stochastik differential equtations; information processes; pricing kernel;

    JEL classification:

    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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