1. One popular concept on stock market price is called martingale pric- ing, which is relevant...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. One popular concept on stock market price is called "martingale pric- ing", which is relevant to "rational expectations" or "efficient market hypothesis" in economic theories. A rough statement on this is that, a (log of) stock market price pt (e.g., S&P 500 index) is supposed to reflect all the relevant information available up to time t, i.e., Ept Ft-1] = Pt-1, therefore pt log Pt is a martingale. (a) Under the martingale pricing, show that continuously compounded (cc) return for stock market price is mds. (b) In what follows, we assume cc return r₁ is a covariance stationary process. Prove the following statements: i. If rt ~ (0,σ²). ii. If rt ~ noise). iid (0, 2) (or independent white noise), then rt ~ mds mds (0,2), then r₁ ~WN (0,02) (or weak white (c) Prove the following statements: i. If {rt} is iid, then it is strictly stationary. ii. If {rt} is strictly stationary and E[r]] < ∞, then it is covari- ance stationary. 1. One popular concept on stock market price is called "martingale pric- ing", which is relevant to "rational expectations" or "efficient market hypothesis" in economic theories. A rough statement on this is that, a (log of) stock market price pt (e.g., S&P 500 index) is supposed to reflect all the relevant information available up to time t, i.e., Ept Ft-1] = Pt-1, therefore pt log Pt is a martingale. (a) Under the martingale pricing, show that continuously compounded (cc) return for stock market price is mds. (b) In what follows, we assume cc return r₁ is a covariance stationary process. Prove the following statements: i. If rt ~ (0,σ²). ii. If rt ~ noise). iid (0, 2) (or independent white noise), then rt ~ mds mds (0,2), then r₁ ~WN (0,02) (or weak white (c) Prove the following statements: i. If {rt} is iid, then it is strictly stationary. ii. If {rt} is strictly stationary and E[r]] < ∞, then it is covari- ance stationary.
Expert Answer:
Answer rating: 100% (QA)
Martingale Pricing and Stock Market Returns a Continuously Compounded Return as Martingale Difference Sequence MDS Under martingale pricing the expected future price given all information available up ... View the full answer
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
Posted Date:
Students also viewed these finance questions
-
Briefly describe ASCII and Unicode and draw attention to any relationship between them. [3 marks] (b) Briefly explain what a Reader is in the context of reading characters from data. [3 marks] A...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Evaluate the stiffness matrix for the elements shown in Figure P11-6. Let E = 100 GPa and v = 0.3? Figure P11-6, (a) (b) (25, 25.0) 2 (10, 0, 0) (40, 0,0) (25, 0, 25) (10, 7, 0) (4, 2, 0) (12, 2, 0)...
-
Give an equation of a line with the stated property. 1. Rises as you move from left to right 2. Falls as you move from left to right 3. Has slope 0 4. Slope not defined 5. Parallel to the line 2x +...
-
What types of IT do you as a student use on a regular basis? How might your life be different if this technology were not available to you?
-
A circular current-carrying wire loop produces a magnetic field. A spinning disk of uniformly distributed charge produces a similar magnetic field. How would you expect the field due to a spinning...
-
Kretz Corporation prepares monthly financial statements and therefore adjusts its accounts at the end of every month. The following information is available for March 2010: a. Kretz Corporation takes...
-
10. A plastic ball is rising in water with terminal speed v. If we use a different plastic whose density is double that of the original ball but still less that density of water, keeping the radius...
-
SAE specifications call for the low-side R-134a servicehose to be A) Solid blue with a black stripe B) Solid blue with no stripe C) Solid blue with a yellow stripe D) Solid black with a blue stripe...
-
Calculate the torque about the z-axis that is out of the page at the origin in the following figure, given that F = 3.20 N, F = 2.00 N, F3 = 2.80 N, and F4 = 1.90 N. 2.1 m 2.8m o 2.2 m, F3 F4 19 29
-
Why should Maersk's human resource management align with the organizations strategic plan
-
Compare and contrast recruitment and selection of internal versus external candidates using best practices from the Society for Human Resource Management (SHRM) website. Refer to the Research and...
-
Explain why it is important to deal with workplace violence and how it differsfrom sexual harassment.
-
Why is marketing research important to the development of a marketing strategy?Provide a specific example.
-
Introduce the topic of algorithms in the selection process. How might the recommendations an algorithm makes differ from those of a hiring manager who is not using data analytics?
-
Task 1. You bought 50 000 USD on the forward market with a delivery in a month. On the day of your purchase the quotes were the following: Spot rate: 1 USD = 3,06 -3,11 PLN .30-day forward rate: 1...
-
Synthesize the products by drawing out reagents and intermediates along the way. `N H. OH HO HO
-
Hoechst Celanese, a pharmaceutical manufacturer, has used a profit-sharing plan, the Hoechst Celanese Performance Sharing Plan, to motivate employees. To operationalize the plan, the Hoechst Celanese...
-
What are the three options for dealing with the difference between actual and applied capacity (overhead) costs?
-
Describe the lean manufacturing approach.
-
A slot machine is a gambling device that the user inserts money into and then pulls a lever (or presses a button). The slot machine then displays a set of random images. If two or more of the images...
-
Design a number guessing game program. The program should generate a random number and then ask the user to guess the number. Each time the user enters his or her guess, the program should indicate...
-
As an illustration of the difficulty in identifying monopolies, try to decide which of the following are monopolies: a train operating company; your local evening newspaper; the village hairdresser;...
Study smarter with the SolutionInn App