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lecture11 - Lecture 11 Asset Pricing Assets and Contingent...

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Lecture 11 Asset Pricing
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ECN/APEC 7240 XI - 2 Assets and Contingent Claims A claim on consumption at time t conditional on history s t is known as a contingent claim . An asset can be viewed as a bundle of contingent claims. If markets are complete, the price of all these contingent claims is already determined. The price of the asset is simply the cost of the bundle.
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ECN/APEC 7240 XI - 3 Asset Pricing Formula Suppose an asset pays dividend d t ( s t ) at time t and history s t . The price of the bundle at t = 0 is The asset must have the same price or there will be an arbitrage opportunity . . ) ( ) ( ) ( 0 0 0 0 0 1 ∑ ∑ = + = t S s t t t t t t s d s q s p
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ECN/APEC 7240 XI - 4 Zero-Coupon Bonds Consider a riskless bond with maturity t . It pays one unit of consumption in all states of the world at period t . . ) ( ) ( 1 0 0 0 0 + = t t S s t t s q s p
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ECN/APEC 7240 XI - 5 Riskless Consol A consol is an asset that risklessly pays one unit of consumption in every period forever.
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