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 continuous 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.

Lüders, Erik und Bernhard Peisl (2001), How Do Investors' Expectations Drive Asset Prices?, ZEW Discussion Paper No. 01-15, Mannheim. Download

Autoren

Lüders, Erik
Peisl, Bernhard

Schlagworte

backward stochastic differential equations, information processes, pricing kernel