Dichotomous Asset Pricing Model
Annals of Economics and Finance, May 2005
30 Pages Posted: 10 Apr 2005
Abstract
Cross-asset derivative securities are studied and a dichotomous asset pricing model (DAPM) is derived that significantly enriches the Sharpe-Lintner-Black capital-asset pricing model. An asset's beta is shown to be observable ex ante through the price of its cross-market call or put, and the DAPM separately predicts the assets' expected return - beta relations under the upper-market and lower-market conditions. A sufficient condition for the DAPM to hold is that assets' return distributions satisfy Ross' (1978) two-fund separation property, which implies that any well-diversified portfolio is both mean-variance and gain-loss efficient.
Keywords: Mean-variance, gain-loss, upper-market beta, lower-market beta, cross-asset derivative security, dichotomous asset pricing
JEL Classification: G12
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Beyond Arbitrage: 'Good Deal' Asset Price Bounds in Incomplete Markets
-
Beyond Arbitrage: "Good-Deal" Asset Price Bounds in Incomplete Markets
-
Losing Money on Arbitrage: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities
By Jun Liu and Francis A. Longstaff
-
By James Dow and Gary B. Gorton
-
Generalized Sharpe Ratios and Asset Pricing in Incomplete Markets
By Aleš Černý
-
The Theory of Good-Deal Pricing in Financial Markets
By Aleš Černý and Stewart D. Hodges
-
Imperfect Arbitrage with Wealth Effects
By Wei Xiong
-
Towards a General Theory of Good Deal Bounds
By Tomas Bjork and Irina Slinko