Financial Management Association

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Relaxing Assumptions in Asset Pricing

• Financial Management Association
• Doctoral Student Symposium
• October 2007

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Standard (Old) Assumptions -Homogeneous
investors -Constant distributions -Mean
variance world As issues of fit arise in the
data, which of these should we relax (first)?

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Recent papers I) -Heterogeneity in investors
preferences Dumas (1989) Wang (1996) Chan
Kogan (2002) Bhamra Uppal (2007) Garleanu
Panageas (2007) Xiouros Zapatero
(2007) Intuition of how differences in risk
aversion could lead to time-variation in price of
risk What are interesting ways to test this?
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II) Other sources of time variation through
business cycle -States of the
economy Changes in conditional distribution of
consumption growth -Xiouros Zapatero
(2007) What might this be related to?
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III) Investors care about more or different
moments of distribution -skewness
-kurtosis -downside risk Note can use
derivative markets to assess/estimate importance
of these pieces of distribution (Bakshi,Kapadia
Madan)

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Other Trading -Fill rates -How does one
measure fill rates (let alone execution cost) of
order that has been submitted and canceled many
times? -What about internal crosses, and dark
pools of liquidity? -Back to heterogeneity