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How Do Investors' Expectations Drive Asset Prices?

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  • Luders, Erik
  • Peisl, Bernhard

Abstract

Based on an extension of the process of investors' expectations to stochastic volatility we derive asset price processes in a general continuous time pricing kernel framework. Our analysis suggests that stochastic volatility of asset price processes results from the fact that investors do not know the risk of an asset and therefore the volatility of the process of their expectations is stochastic, too. Furthermore, our model is consistent with empirical studies reporting negative correlation between asset prices and their volatility as well as significant variations in the Sharpe ratio. Copyright 2001 by MIT Press.

Suggested Citation

  • Luders, Erik & Peisl, Bernhard, 2001. "How Do Investors' Expectations Drive Asset Prices?," The Financial Review, Eastern Finance Association, vol. 36(4), pages 75-98, November.
    • Handle: RePEc:bla:finrev:v:36:y:2001:i:4:p:75-98
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    Cited by:

    1. Lüders, Erik, 2002. "Why Are Asset Returns Predictable?," ZEW Discussion Papers 02-48, ZEW - Leibniz Centre for European Economic Research.
    2. Lüders, Erik, 2002. "Asset Prices and Alternative Characterizations of the Pricing Kernel," ZEW Discussion Papers 02-10, ZEW - Leibniz Centre for European Economic Research.
    3. Schröder, Michael & Lüders, Erik, 2004. "Modeling Asset Returns: A Comparison of Theoretical and Empirical Models," ZEW Discussion Papers 04-19 [rev.], ZEW - Leibniz Centre for European Economic Research.

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