## Equilibrium Asset Pricing with Non-Gaussian Factors and Exponential Utilities |
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Abstract:We analyse the equilibrium asset pricing implications for an economy with single period return exposures to explicit non-Gaussian, skewed and potentially long-tailed systematic factors and Gaussian idiosyncratic components. Investors maximize expected exponential utility and equilibrium factor prices are shown to reflect exponentially tilted prices for non-Gaussian factor risk exposures. It is shown that these prices may be directly estimated from the univariate probability law of the factor exposure, given an estimate of average risk aversion in the economy. In addition a residual form of the capital asset pricing model continues to hold and prices the idiosyncratic or Gaussian risks. The theory is illustrated on data for the US economy using independent components analysis to identify the factors and the variance gamma model to describe the probability law of the non-Gaussian factors. It is shown that the residual CAPM accounts for no more than one percent of the pricing of risky assets, while the exponentially tilted systematic factor risk exposures account for the bulk of risky asset pricing. |
Type of Seminar:Public Seminar |

Speaker:Prof. Dilip Madan Robert H. Smith School of Business | |

Date/Time:Apr 07, 2006 10:30 | |

Location:ETH Zurich, Main Building, Room HG F 26.1 | |

Contact Person:Simon Keel | |

No downloadable files available. | |

Biographical Sketch:Dilip Madan is Ph.D. in Economics, University of Maryland and Ph.D. in Mathematics, University of Maryland. Dilip Madan is Professor of Finance at the Robert H. Smith School of Business. He specializes in Mathematical Finance. He also serves as a consultant to Morgan Stanley, Caspian Capital LLC, and the FDIC. He is a founding member and immediate Past President of the Bachelier Finance Society, Co-Editor of Mathematical Finance and Associate Editor for the Journal of Credit Risk and Quantitative Finance. His work is dedicated to improving the quality of financial valuation models, enhancing the performance of investment strategies, and advancing the understanding and operation of efficient risk allocation in modern economies. Recent major contributions have appeared in Mathematical Finance, Finance and Stochastics, Quantitative Finance, The Journal of Computational Finance, among other Journals. |