JM
J.J. Mulder
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The Mechanics of Asset Pricing
An Economic Multiport Model for Forecasting Returns and their Volatility
Asset pricing models determine the market prices of securities under uncertainty. Existing approaches use statistical models to describe time variation in trend, volatility, and returns. In these models, price formation is typically inferred from correlations by estimating or calibrating model parameters on historical data.
In this thesis, we formulate an incentive-driven asset pricing model using mechanical analogues; specifically, a model wherein mechanical forces act as analogues to economic incentives. The key insight is that uncertainty in market prices can be characterized by two incentives.
The first incentive is an analogue to the Langevin force that drives an agent to bear volatility: the volatility incentive. The second incentive is an analogue to temperature that drives agents to invest: the investment incentive. These incentives drive separate flows of investment and money, which together determine a fully incentive-driven market price.
To show how market prices and household returns are driven by incentives, we build a multiport model of the economy with households, firms, and a financial market. We analyze how households allocate wage income among investment, saving, and consumption by balancing the incentives for each. We further show how the model provides market price projections, which we use to analyze household returns. Finally, we show how external shocks induce volatility regime switching and use this to provide a causal explanation for price crashes. ...
In this thesis, we formulate an incentive-driven asset pricing model using mechanical analogues; specifically, a model wherein mechanical forces act as analogues to economic incentives. The key insight is that uncertainty in market prices can be characterized by two incentives.
The first incentive is an analogue to the Langevin force that drives an agent to bear volatility: the volatility incentive. The second incentive is an analogue to temperature that drives agents to invest: the investment incentive. These incentives drive separate flows of investment and money, which together determine a fully incentive-driven market price.
To show how market prices and household returns are driven by incentives, we build a multiport model of the economy with households, firms, and a financial market. We analyze how households allocate wage income among investment, saving, and consumption by balancing the incentives for each. We further show how the model provides market price projections, which we use to analyze household returns. Finally, we show how external shocks induce volatility regime switching and use this to provide a causal explanation for price crashes. ...
Asset pricing models determine the market prices of securities under uncertainty. Existing approaches use statistical models to describe time variation in trend, volatility, and returns. In these models, price formation is typically inferred from correlations by estimating or calibrating model parameters on historical data.
In this thesis, we formulate an incentive-driven asset pricing model using mechanical analogues; specifically, a model wherein mechanical forces act as analogues to economic incentives. The key insight is that uncertainty in market prices can be characterized by two incentives.
The first incentive is an analogue to the Langevin force that drives an agent to bear volatility: the volatility incentive. The second incentive is an analogue to temperature that drives agents to invest: the investment incentive. These incentives drive separate flows of investment and money, which together determine a fully incentive-driven market price.
To show how market prices and household returns are driven by incentives, we build a multiport model of the economy with households, firms, and a financial market. We analyze how households allocate wage income among investment, saving, and consumption by balancing the incentives for each. We further show how the model provides market price projections, which we use to analyze household returns. Finally, we show how external shocks induce volatility regime switching and use this to provide a causal explanation for price crashes.
In this thesis, we formulate an incentive-driven asset pricing model using mechanical analogues; specifically, a model wherein mechanical forces act as analogues to economic incentives. The key insight is that uncertainty in market prices can be characterized by two incentives.
The first incentive is an analogue to the Langevin force that drives an agent to bear volatility: the volatility incentive. The second incentive is an analogue to temperature that drives agents to invest: the investment incentive. These incentives drive separate flows of investment and money, which together determine a fully incentive-driven market price.
To show how market prices and household returns are driven by incentives, we build a multiport model of the economy with households, firms, and a financial market. We analyze how households allocate wage income among investment, saving, and consumption by balancing the incentives for each. We further show how the model provides market price projections, which we use to analyze household returns. Finally, we show how external shocks induce volatility regime switching and use this to provide a causal explanation for price crashes.