Continuous‐time filtering is explained, including the Kalman filter and filtering for a Markov chain with hidden states. Filtering theory is applied to analyze portfolio choice and equilibrium asset prices. When the expected return of an asset is unknown and is estimated from past returns, the myopic demand is a momentum strategy. When investors learn expected consumption growth from realized consumption growth, equilibrium prices are more sensitive to consumption shocks and the equity premium is higher. When the consumption growth rate follows a Markov chain with hidden states, return volatility tends to be higher when investors are less certain about which state the economy is in. We survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices.

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• Continuous‐time filtering is explained, including the Kalman filter and filtering for a Markov chain with hidden states.
• We survey the literature that has explored the implications of decision-making under ambiguity for financial market outcomes, such as portfolio choice and equilibrium asset prices.

Traditional factor models, including the CAPM, are related to or derived from stochastic discount factors. A chapter on stochastic calculus provides the needed tools for analyzing continuous‐time models. The portfolio choice model is introduced, and the first‐order condition is derived. Properties of the demand for a single risky asset are derived from second‐order risk aversion and decreasing absolute risk aversion.

Essays on Intertemporal Consumption and Portfolio Choice

The CAPM and the Fama‐French‐Carhart model are evaluated relative to portfolios based on sorts on size, book‐to‐market, and momentum. If your institution is not listed or you cannot sign in to your institution’s website, please contact your librarian or administrator.

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Contents

For librarians and administrators, your personal account also provides access to institutional account management. Here you will find options to view and activate subscriptions, manage institutional settings and access options, access usage statistics, and more. In
the 2nd edition of Asset Pricing and portfolio Choice Theory, Kerry
E. Back offers a concise yet comprehensive introduction to and overview of
asset pricing.

Sign in

Typically, access is provided across an institutional network to a range of IP addresses. This authentication occurs automatically, and it is not possible to sign out of an IP authenticated account. Factors can be replaced by the returns or excess returns that are maximally correlated (the projections of the factors). A factor model is equivalent to an affine representation of an SDF and to spanning a return on the mean‐variance frontier. Statistical factor models are defined as models in which factors explain the covariance matrix of returns. A proof is given of the Arbitrage Pricing Theory, which states that statistical factors are approximate pricing factors.

Single-Period Models

The first two parts of the book explain portfolio choice and asset
pricing theory in single-period, discrete-time, and continuous-time models. For
valuation, the focus throughout is on stochastic discount factors and their
properties. A section on derivative securities covers the usual derivatives
(options, forwards and futures, and term structure models) and also
applications of perpetual options to corporate debt, real options, and optimal
irreversible investment. A chapter on “explaining puzzles” and the
last part of the book provide introductions to a number of additional current
topics in asset pricing research, including rare disasters, long-run risks,
external and internal habits, asymmetric and incomplete information,
heterogeneous beliefs, and non-expected-utility preferences. Each chapter
includes a “Notes and References” section providing additional
pathways to the literature.

Optimal investments are independent of initial wealth for investors with constant absolute risk aversion. Optimal investments are affine functions of initial wealth for investors iwth linear risk tolerance. The optimal portfolio for an investor with constant absolute risk aversion is derived when asset returns are normally distributed. Investors with quadratic utility have mean‐variance preferences, and investors have mean‐variance preferences when returns are elliptically distributed.

Ambiguity in asset pricing and portfolio choice: a review of the literature

This book is intended as a textbook for asset pricing theory courses at the Ph.D. or Masters in Quantitative Finance level and as a reference for financial researchers. The first two parts of the book explain portfolio choice and asset pricing theory in single‐period, discrete‐time, and continuous‐time models. For valuation, the focus throughout is on stochastic discount factors and their properties.