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Empirical Asset Pricing Theory - Assignment Example

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Name: University: Course: Tutor: Date: Empirical Asset Pricing Theory Introduction Empirical pricing theories relating to the assets are used as benchmarks for valuation of an asset. Stochastic discount factor method of pricing is itself a criterion through which assets are valued…

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Empirical Asset Pricing Theory

In other words, the paper will look at the negative covariance of SDF and excess returns. The paper will also outline the Fama-French factors. This will include entailing how these factors work, and the motives behind choosing or selecting of models. Finally, the paper will discuss how the technique used by Pastor and Stambaugh differ from the ones used by Fama-French factors. Stochastic Discount Factor Pricing Model SDF as a Factor Pricing Model According to Fama and French (25 - 30) this model helps in the formulating of n econometric analysis that is used in the pricing of assets. The methods included this model include the capital asset pricing model that was proposed by Sharpe in 1964 and other as well as the consumption based inter-temporal capital asset pricing models (CCAPM). Stochastic discount factor (SDF) uses both of the approaches that are used in asset pricing. This includes the absolute and the relative pricing of asset. The absolute pricing of asset involve the pricing of an asset relative to the sources that expose it to the macroeconomic risks. The relative pricing of asset entails pricing assets according to how other assets are priced. The pricing equation that is used to estimate the stochastic discount factor is normally assumed. The limitations that are imposed on the behavior relating to the stochastic model are assumed to be standard. ...
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