By Erik Paul Lüders
In this booklet the relation among the features of traders' personal tastes and expectancies and equilibrium asset cost approaches are analysed. it's proven that declining elasticity of the pricing kernel may end up in confident serial correlation of brief time period asset returns and adverse serial correlation of long-term returns. Analytical asset rate procedures also are derived. not like the generally used "empirical" time-series types those methods don't lack a legitimate monetary starting place. in addition, not like the preferred Ornstein Uhlenbeck method and the consistent Elasticity of Variance version the proposed stochastic procedures are in line with a classical consultant investor economy.
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Additional info for Economic Foundation of Asset Price Processes
A common conclusion from investigations of the risk-n eutral density function and th e impli ed volatili ty is t hat, espec ially afte r t he cras h of 1987, options ar e no longer pri ced according t o Black and Scholes. J ackwerth and Rubinstein  docum ent that in contrast to t he Black-Scholes model, t he riskneutral distribution implicit in options on the S&P 500 ind ex is left-skewed and leptokurti c aft er th e cras h. Moreover , Rubinst ein  finds that th e implied volat ility of S&P 500 options is U'-shap ed befor e th e crash (volat ilitysmile) and that it decreases with t he strike pr ice aft er t he cras h (volatilityskew) while Black-Scholes would imply a flat volatility cur ve.
The problem remains if the new data are correlated with the old dataset (see, for example, Foster, Smith and Whaley , p. 600) . Also the study by Cremers  recognises the problems of data-snooping and model uncertainty. He uses a Bayesian approach which explicitly accounts for model uncertainty to identify the factors with predictive power. This allows to specifically address the question whether investors could have been able to exploit the ex post documented predictability. In line with the results of Bossaerts and Hillion , selecting the models with classical statistical model selection criteria as the R 2 he finds strong in-sample predictability, but no out-of-sample predictability.
They analyze S&P 500 and FTSE 100 options and find reaso nable risk aversion coefficients . However , since they restrict the pri cing kern el t o be consiste nt with eit her constant absolute risk aversion or const ant relativ e risk aversion, their risk aversi on fun ctions do not exhibit anomalies, by definition. Bu t they find evidence t hat risk aversion declin es with the forecast horizon and with t he level of volatili ty. Separ atin g the sa mple into two sub-samples, one wit h high and the ot her one with low implied volatility of at-the-money options , t hey find t hat t he estimated risk aversion coefficient is lower in the sub-sample of high impli ed volatility.
Economic Foundation of Asset Price Processes by Erik Paul Lüders