Considerable attention has recently been given to general equilibrium models of the pricing of capital assets. Of these, perhaps the best known is the mean-variance formulation originally developed by Sharpe (1964) and Treynor (1961), and extended and clarified by Lintner (1965a; 1965b), Mossin (1966), Fama (1968a; 1968b), and Long (1972). In addition Treynor (1965), Sharpe (1966), and Jensen (...

A balance sheet structure including fixed assets, net working capital and risky long-term debt leads to a model for option pricing of the firm’s equity. Each of the financial components constitutes a source of risk. A hedge based on three distinct options and the stock enables risk neutral valuation and avoids the problems of lack of tradability of the assets and market incompleteness reflected...

In this paper, we discuss the paradigm shift in bank capital from the “gone concern” to the “going concern” mindset. We then propose a methodology for pricing a product of this shift called Contingent Capital Notes (“CoCos”). The Merton Model can determine a price for credit risk by using the firm’s equity value as a call option on those assets. Our pricing methodology for CoCos also uses the c...

The online version of A Behavioral Approach to Asset Pricing by Hersh Shefrin. Part III: Developing Behavioral Asset Pricing Models.A unified behavioral approach to asset pricing requires a general definition of sentiment. Objective pdf and the individual investors subjective pdf. ÂœA mathematical-economist-turned-behavioral-economist, Hersh Shefrin challenges and delights the reader by applyin...

We study a mean-variance capital asset pricing model (CAPM) in which investors have different probability beliefs about assets returns and different attitudes towards risk, all assets are risky, short-selling is allowed and satiation is possible. First, we prove that there exists a competitive equilibrium in the model under a rather general condition. This condition indicates a simple relations...

In strict terms, the Capital Asset Pricing Model applies only to marketed assets, but the CAPM is frequently used to assign prices to nonmarketed assets as well. The Correlation Pricing Formula (CPF) is similar in form to the CAPM, and gives the same result. However, the CPF expresses the price of a nonmarketed asset in terms of a priced asset that is most correlated with the nonmarketed asset,...

In this paper, we aim at 1. giving formulas of prices and replicating-strategies of defaultable securities(e.g., bonds, swaps, derivatives) in incomplete market, and 2. giving “solvable” examples of quantile hedging strategies in incomplete market. Considering an incomplete market that consists of tradable assets and an unhedgeable defaultable security, whose non-predictable default time has st...