How do investors' expectations drive asset prices?


Lüders, Erik ; Peisl, Bernhard


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URL: http://ub-madoc.bib.uni-mannheim.de/499
URN: urn:nbn:de:bsz:180-madoc-4997
Document Type: Working paper
Year of publication: 2001
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: C69 G12 ,
Subject headings (SWD): Stochastische Abhängigkeit , Kommunikation
Abstract: Asset price processes are completely described by information processes and investors' preferences. In this paper we derive the relationship between the process of investors' expectations of the terminal stock price and asset prices in a general continous time pricing kernel framework. To derive the asset price process we make use of the modern technique of forward-backward stochastic differential equations. With this approach it is possible to show the driving factors for stochastic volatility of asset prices and to give theoretical arguments for empirically well documented facts. We show that stylized facts that look at first hand like financial market anomalies may be explained by an information process with stochastic volatility.
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Lüders, Erik ; Peisl, Bernhard (2001) How do investors' expectations drive asset prices? Open Access [Working paper]
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