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Asset Prices and Alternative Characterizations of the Pricing Kernel

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  • Lüders, Erik

Abstract

In a continuous-time representative investor economy with an exogenously given information process, asset prices are derived for alternative characterizations of the pricing kernel. In addition to the characterization of forward prices in a general representative investor economy a detailed analysis of forward prices for the HARA-class is given. In particular, analytical and numerical solutions of forward prices are derived for a representative investor with non-constant relative risk aversion. The derived asset prices are consistent with empirically well documented characteristics as mean reversion and random volatility. Hence, they are viable alternatives to the geometric Brownian motion.

Suggested Citation

  • 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.
  • Handle: RePEc:zbw:zewdip:887
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    Cited by:

    1. Lüders, Erik, 2002. "Why Are Asset Returns Predictable?," ZEW Discussion Papers 02-48, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. 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.

    More about this item

    Keywords

    equilibrium price processes; displaced diffusion process; random volatility; mean-reversion;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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