1. Motivation New information-based asset-pricing models are often extensions of either Kyle (1985) or Grossman-Stiglitz (1980). At first glance, these two canonical models look quite similar. Both price an asset with an unknown payout, like a stock … [Continue reading]
1. Motivation A stock's idiosyncratic-return volatility is the root-mean-squared error, $\mathit{ivol}_{n,t} = \sqrt{ \sfrac{1}{D_t} \cdot \sum_{d_t=1}^{D_t} \varepsilon_{n,d_t}^2}$, from the daily regression \begin{align} r_{n,d_t} = \alpha + … [Continue reading]
1. Motivating Example If you regress the current quarter's inflation rate, $x_t$, on the previous quarter's rate using data from FRED over the period from Q3-1987 to Q4-2014, then you get the AR(1) point estimate, \begin{align} x_t = … [Continue reading]
1. Motivation How persistent has IBM's daily trading volume been over the last month? How persistent have Apple's monthly stock returns been over the last $5$ years of trading? What about the US's annual GDP growth over the last century? To answer … [Continue reading]
1. Motivation Imagine you're an arbitrageur and you see a sequence of abnormal returns: \begin{align} \mathit{ra}_t \overset{\scriptscriptstyle \mathrm{iid}}{\sim} \begin{cases} +1 &\text{w/ prob } \sfrac{1}{2} \cdot (1 + \alpha) \\ -1 … [Continue reading]