Cost minimization and asset pricing

A cost-based approach to asset-pricing equilibrium relationships is developed. A cost function induces a stochastic discount factor (pricing kernel) that is a function of random output, prices, and capital stockt. By eliminating opportunities for arbitrage between financial markets and the production technology, firms minimize the current cost of future consumption. The first-order conditions for this cost minimization problem generate the stochastic discount factor. The cost-based approach is dual in nature and determines state-claim prices as the current-period marginal cost of increasing future stochastic output. A cost-based pricing kernel is estimated using annual time-series data on macroeconomic variables and returns data


Issue Date:
2005
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/151170
Total Pages:
29
JEL Codes:
D21; D4
Series Statement:
Risk and Uncertainty Program
R05/3




 Record created 2017-04-01, last modified 2017-08-27

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