IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/112255.html
   My bibliography  Save this paper

Price and Payoff Autocorrelations in the Consumption-Based Asset Pricing Model

Author

Listed:
  • Olkhov, Victor

Abstract

This paper considers common consumption-based asset pricing model and derives approximations of the basic pricing equation that describes mutual dependence of the mean price “to-day”, mean payoff “next-day”, price and payoff volatility and impact of the price and payoff autocorrelations. The deep conjunction of the consumption-based model with other modifications of asset pricing as ICAPM, APM and etc. (Cochrane, 2001) causes that our results can be derived in other versions of CAPM. We introduce the market-based price averaging and discuss the origin of its distinctions from the common frequency-based price probability. The market-based price statistical moments, price volatility and autocorrelation are determined by statistical moments of the random market trade value and volume. Distinctions between the frequency-based and the market-based approaches to price averaging cause different assessment of the price volatility and autocorrelation and result in different treatment of the price-volume relations in particular. The market-based price averaging provides direct dependence of the price statistical moments on the market trade value and volume statistical moments. It establishes a unified ground for description of financial markets but uncovers tough complexity. The usage of the frequency-based or proposed market-based price averaging is completely determined by agent’s preferences, beliefs and habits. The collision between “rational” market-based approach and “soulful” or “home-felt” frequency-based approach to price averaging creates significant challenge for financial theory.

Suggested Citation

  • Olkhov, Victor, 2022. "Price and Payoff Autocorrelations in the Consumption-Based Asset Pricing Model," MPRA Paper 112255, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:112255
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/112255/1/MPRA_paper_112255.pdf
    File Function: original version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/112296/1/MPRA_paper_112296.pdf
    File Function: revised version
    Download Restriction: no
    File URL: https://mpra.ub.uni-muenchen.de/120535/1/MPRA_paper_120535.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Francis X. Diebold & Georg Strasser, 2013. "On the Correlation Structure of Microstructure Noise: A Financial Economic Approach," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1304-1337.
    2. David D. Friedman, 1990. "Price Theory: An Intermediate Text," Online economics textbooks, SUNY-Oswego, Department of Economics, number prin13.
    3. Terrance Odean., 1996. "Volume, Volatility, Price and Profit When All Trader Are Above Average," Research Program in Finance Working Papers RPF-266, University of California at Berkeley.
    4. Olkhov, Victor, 2020. "Classical Option Pricing and Some Steps Further," MPRA Paper 105431, University Library of Munich, Germany, revised 28 Dec 2020.
    5. Nelson Lind & Natalia Ramondo, 2023. "Trade with Correlation," American Economic Review, American Economic Association, vol. 113(2), pages 317-353, February.
    6. Francisco Barillas & Jay Shanken, 2018. "Comparing Asset Pricing Models," Journal of Finance, American Finance Association, vol. 73(2), pages 715-754, April.
    7. Alexander Buryak & Ivan Guo, 2014. "Effective And Simple Vwap Options Pricing Model," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(06), pages 1-13.
    8. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 905-939.
    9. Gopikrishnan, P & Plerou, V & Liu, Y & Amaral, L.A.N & Gabaix, X & Stanley, H.E, 2000. "Scaling and correlation in financial time series," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 287(3), pages 362-373.
    10. Plerou, Vasiliki & Gopikrishnan, Parameswaran & Rosenow, Bernd & Amaral, Luis A.N. & Stanley, H.Eugene, 2000. "Econophysics: financial time series from a statistical physics point of view," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 279(1), pages 443-456.
    11. Michael Michaely, 1971. "Appendix: A Few Experiments with Formal Correlation Analysis," NBER Chapters, in: The Responsiveness of Demand Policies to Balance of Payments: Postwar Patterns, pages 281-287, National Bureau of Economic Research, Inc.
    12. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    13. Victor Olkhov, 2018. "How Macro Transactions Describe the Evolution and Fluctuation of Financial Variables," IJFS, MDPI, vol. 6(2), pages 1-19, March.
    14. DeFusco, Anthony A. & Nathanson, Charles G. & Zwick, Eric, 2022. "Speculative dynamics of prices and volume," Journal of Financial Economics, Elsevier, vol. 146(1), pages 205-229.
    15. Andersen, Torben G. & Bollerslev, Tim & Christoffersen, Peter F. & Diebold, Francis X., 2006. "Volatility and Correlation Forecasting," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 15, pages 777-878, Elsevier.
    16. John H Cochrane, 2022. "Portfolios for Long-Term Investors [Rare disasters and asset markets in the twentieth century]," Review of Finance, European Finance Association, vol. 26(1), pages 1-42.
    17. Olkhov, Victor, 2022. "Introduction of the Market-Based Price Autocorrelation," MPRA Paper 112003, University Library of Munich, Germany.
    18. Olkhov, Victor, 2022. "Market-Based Price Autocorrelation," MPRA Paper 120288, University Library of Munich, Germany, revised 26 Feb 2024.
    19. Victor Olkhov, 2021. "To VaR, or Not to VaR, That is the Question," Papers 2101.08559, arXiv.org, revised Apr 2024.
    20. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    21. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(1), pages 109-126, March.
    22. William N. Goetzmann & Lingfeng Li & K. Geert Rouwenhorst, 2005. "Long-Term Global Market Correlations," The Journal of Business, University of Chicago Press, vol. 78(1), pages 1-38, January.
    23. Olkhov, Victor, 2021. "Theoretical Economics and the Second-Order Economic Theory. What is it?," MPRA Paper 110893, University Library of Munich, Germany.
    24. Enzo Busseti & Stephen Boyd, 2015. "Volume Weighted Average Price Optimal Execution," Papers 1509.08503, arXiv.org.
    25. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    26. Michael Michaely, 1971. "The Responsiveness of Demand Policies to Balance of Payments: Postwar Patterns," NBER Books, National Bureau of Economic Research, Inc, number mich71-1.
    27. Alexander Buryak & Ivan Guo, 2014. "Effective and simple VWAP option pricing model," Papers 1407.7315, arXiv.org.
    28. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    29. Shephard, N.G., 1991. "From Characteristic Function to Distribution Function: A Simple Framework for the Theory," Econometric Theory, Cambridge University Press, vol. 7(4), pages 519-529, December.
    30. Eugene F. Fama, 2014. "Two Pillars of Asset Pricing," American Economic Review, American Economic Association, vol. 104(6), pages 1467-1485, June.
    31. Raymond W. Goldsmith & Robert E. Lipsey, 1963. "Asset Prices and the General Price Level," NBER Chapters, in: Studies in the National Balance Sheet of the United States, Volume 1, pages 166-189, National Bureau of Economic Research, Inc.
    32. John Y. Campbell, 2014. "Empirical Asset Pricing: Eugene Fama, Lars Peter Hansen, and Robert Shiller," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(3), pages 593-634, July.
    33. repec:bla:jfinan:v:53:y:1998:i:6:p:1887-1934 is not listed on IDEAS
    34. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," The Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Victor Olkhov, 2023. "Market-Based Probability of Stock Returns," Papers 2302.07935, arXiv.org, revised Feb 2024.
    2. Olkhov, Victor, 2022. "The Market-Based Asset Price Probability," MPRA Paper 113096, University Library of Munich, Germany.
    3. Olkhov, Victor, 2023. "The Market-Based Statistics of “Actual” Returns of Investors," MPRA Paper 116896, University Library of Munich, Germany.
    4. Olkhov, Victor, 2022. "Why Economic Theories and Policies Fail? Unnoticed Variables and Overlooked Economics," MPRA Paper 114187, University Library of Munich, Germany.
    5. Olkhov, Victor, 2022. "Economic Policy - the Forth Dimension of the Economic Theory," MPRA Paper 112685, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Olkhov, Victor, 2022. "The Market-Based Asset Price Probability," MPRA Paper 113096, University Library of Munich, Germany.
    2. Olkhov, Victor, 2022. "Introduction of the Market-Based Price Autocorrelation," MPRA Paper 112003, University Library of Munich, Germany.
    3. Victor Olkhov, 2021. "Three Remarks On Asset Pricing," Papers 2105.13903, arXiv.org, revised Jan 2024.
    4. Olkhov, Victor, 2022. "Market-Based Price Autocorrelation," MPRA Paper 120288, University Library of Munich, Germany, revised 26 Feb 2024.
    5. Olkhov, Victor, 2022. "Why Economic Theories and Policies Fail? Unnoticed Variables and Overlooked Economics," MPRA Paper 114187, University Library of Munich, Germany.
    6. Olkhov, Victor, 2023. "Economic Theory as Successive Approximations of Statistical Moments," MPRA Paper 118722, University Library of Munich, Germany.
    7. Olkhov, Victor, 2020. "Volatility Depend on Market Trades and Macro Theory," MPRA Paper 102434, University Library of Munich, Germany.
    8. Victor Olkhov, 2022. "Price and Payoff Autocorrelations in a Multi-Period Consumption-Based Asset Pricing Model," Papers 2204.07506, arXiv.org, revised Mar 2024.
    9. Victor Olkhov, 2020. "Price, Volatility and the Second-Order Economic Theory," Papers 2009.14278, arXiv.org, revised Apr 2021.
    10. Victor Olkhov, 2023. "Economic Complexity Limits Accuracy of Price Probability Predictions by Gaussian Distributions," Papers 2309.02447, arXiv.org, revised Apr 2024.
    11. Serge Darolles & Gaëlle Le Fol, 2003. "Trading Volume and Arbitrage," Working Papers 2003-46, Center for Research in Economics and Statistics.
    12. Chuang, Wen-I & Lee, Bong-Soo, 2006. "An empirical evaluation of the overconfidence hypothesis," Journal of Banking & Finance, Elsevier, vol. 30(9), pages 2489-2515, September.
    13. Victor Olkhov, 2019. "Financial Variables, Market Transactions, and Expectations as Functions of Risk," IJFS, MDPI, vol. 7(4), pages 1-27, November.
    14. Yamani, Ehab, 2023. "Return–volume nexus in financial markets: A survey of research," Research in International Business and Finance, Elsevier, vol. 65(C).
    15. Victor Olkhov, 2023. "Market-Based Probability of Stock Returns," Papers 2302.07935, arXiv.org, revised Feb 2024.
    16. Joel Peress, 2014. "The Media and the Diffusion of Information in Financial Markets: Evidence from Newspaper Strikes," Journal of Finance, American Finance Association, vol. 69(5), pages 2007-2043, October.
    17. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2011. "Recent trends in trading activity and market quality," Journal of Financial Economics, Elsevier, vol. 101(2), pages 243-263, August.
    18. Andrew W. Lo & Jiang Wang, 2006. "Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model," Journal of Finance, American Finance Association, vol. 61(6), pages 2805-2840, December.
    19. Gagnon, Louis & Karolyi, G. Andrew, 2009. "Information, Trading Volume, and International Stock Return Comovements: Evidence from Cross-Listed Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(4), pages 953-986, August.
    20. Simon Gervais & Ron Kaniel & Dan H. Mingelgrin, 2001. "The High‐Volume Return Premium," Journal of Finance, American Finance Association, vol. 56(3), pages 877-919, June.

    More about this item

    Keywords

    asset pricing; autocorrelation; price probability; market trades;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:112255. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.