We investigate the relation between the fair price for European-style vanilla options and the probability of short-term returns on the underlying asset in the absence of transaction costs. If the asset’s future price has finite expectation, the option’s fair value satisfies a parabolic partial differential equation of the Black-Scholes type in the absence of arbitrage opportunities. However, th...

One of the features of a financial market, the stock market, in particular, is the market sentiment which is the overall attitude of investors toward a particular security or financial market. Investors always seek to create a portfolio with minimum risk while maintaining the expected return level. Therefore, perceiving the relationship between the stock returns and markets returns can be helpf...

The paper discusses a way in which price uncertainty may affect the extent of idiosyncratic, uninsurable risks in an incomplete markets economy with nominal assets and thereby affect output and welfare. Although the returns on these assets are constant and riskfree in nominal terms, price uncertainty causes their real returns to be stochastic. This affects the ability of households to diversify...

This paper documents that the earnings yield and book-to-price combine to predict equity returns in a way that is consistent with the rational pricing of risk. It is well known that earnings yields predict returns in the cross-section, consistent with standard formulas that show that the earnings yield equals the required return when there is no expected earnings growth beyond that from retenti...

In this paper we assess the role of capital-embodied technology shocks in explaining properties of the cross section of stock returns. Existing theories seem to disagree on the sign and magnitude of the price the market demands for bearing the risk of such shocks: while a negative price is necessary to justify the value premium or the cross-sectional predictability of returns by firm characteri...

The present study explores the effect of the gambler’s fallacy on stock trading volumes. I hypothesize that if a stock’s price rises (falls) during a number of consecutive trading days, then the gambler’s fallacy may cause at least some of the investors to expect that the stock’s price “has” to subsequently fall (rise), and thus, to increase their willingness to sell (buy) the stock, resulting ...

The interest in predicting stock prices or returns is probably as old as the markets themselves, and the literature on the subject is enormous. Fama (1970) reviews early work and provides some organizing principles. This chapter concentrates selectively on developments following Fama's review. In that review, Fama describes increasingly fine information sets in a way that is useful in organizin...