This paper investigates whether the degree of predictability can be explained by existing asset pricing models, and provides two theoretical upper bounds on the R-square of the regression of stock returns on predictors for given classes of models of interest. Empirically, we find that the predictive R-square is significantly larger than the upper bounds permitted by well known asset pricing mod...

a r t i c l e i n f o The systematic and important role of investor sentiment has been supported by some recent empirical and theoretical literatures. In this paper, we present a dynamic asset pricing model with heterogeneous sentiments and we find that the equilibrium stock price is the wealth-share-weighted average of the stock prices that would prevail in an economy with one sentiment invest...

A central challenge in asset pricing is the weak connection between stock returns and observable economic fundamentals. We provide evidence that this connection is stronger than previously thought. We use a modified version of the Bry-Boschan algorithm to identify long-run swings in the stock market. We call these swings long-run bull and bear episodes. We find that there is a high correlation ...

I derive a production-based asset pricing formula to infer aggregate stock market returns from macroeconomic time series when the technology is putty-clay. Capital heterogeneity leads to variation in the aggregate stock market value through a new compositional e¤ect. The asset pricing formula, which holds regardless of the stochastic discount factor, predicts that the stock market value is high...

We develop a GARCH option model with a variance premium by combining the HestonNandi (2000) dynamic with a new pricing kernel. While the pricing kernel is monotonic in the stock return and in variance, its projection onto the stock return is nonmonotonic. A negative variance premium makes it appear U-shaped. We present new semi-parametric evidence to confirm this U-shaped relationship between t...

The option pricing problem is one of central contents in modern finance. In this paper, European option pricing formula is formulated for Liu’s hybrid stock model with randomness and fuzziness. This formula may be regarded as a generalization of Black-Scholes formula and Qin-Li’s option pricing formula.

This paper develops three polynomial-time pricing techniques for European Asian options with provably small errors, where the stock prices follow binomial trees or trees of higher-degree. The first technique is the first known Monte Carlo algorithm with analytical error bounds suitable for pricing single-stock options with meaningful confidence and speed. The second technique is a general recur...

The increasing interest in financial innovation of enterprises has heightened the need for the knowledge of accurate pricing for derivatives in actual discrete-time incomplete market, especially for futures, the most actively traded derivatives in China. Nevertheless, even contingent claim pricing in such markets have few previous researches concentrated on, quite apart from futures. This paper...

The main goal of the present study is testing asymmetric risk pricing and comparing it with pricing of traditional risk measures in Tehran Stock Market. Accordingly, a sample consisting of 101 companies listed in Tehran Stock Market during 2002-2013 went under investigation. In order to test asymmetric risk pricing, regression model of panel data was applied. The results revealed a positive and...