We explore the asset pricing implications of an investment-based model that features a stochastic technology frontier and costly technology adoption. Firms adopt the latest technology embodied in new capital to reach a stochastic technology frontier, but this decision entails an adoption cost. The model predicts that old capital firms are more risky and hence offer a higher returns than young c...

In a seminal paper in 1973, Black and Scholes argued how expected distributions of stock prices can be used to price options. Their model assumed a directed random motion for the returns and consequently a lognormal distribution of asset prices after a finite time. We point out two problems with their formulation. First, we show that the option valuation is not uniquely determined; in particula...

We propose a model in which real interest rates respond to both expected consumption growth and time preferences. Exposures to future consumption growth and time preference interest rate shocks are both priced relative to the Capital Asset Pricing Model (CAPM) and the Consumption Capital Asset Pricing Model (CCAPM). However, the two types of interest rate risk have different prices, and when el...

Cross-asset derivative securities are studied and a dichotomous asset pricing model (DAPM) is derived that significantly enriches the Sharpe-Lintner-Black capital asset pricing model. An assets beta is shown to be observable ex ante through the price of its cross-market call or put, and the DAPM separately predicts the assets’ expected return beta relations under the upper-market and lower-mark...

This article investigates international stock market integration in largest (based on nominal GDP and purchasing power parity GDP) four developed namely USA, EMU, Japan and UK and two Asian emerging namely China and India international stock markets over the period June 1994 to June 2009. To model stock market integration we estimate a dynamic version of international capital asset pricing mode...

Since the inception of Capital Asset Pricing Model (CAPM), numerous empirical studies have been conducted to test its effectiveness. However, there are several disputes surrounding CAPM model's implementation and study in Chinese securities market. This paper first describes significance model testing validity Then summarizes 11 papers that include using data from Shanghai Shenzhen stock exchan...

In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically approximate equilibria for a variety of di erent speci cations for preferences, endowments and dividends and c...