Equilibrium pricing

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  • Price theory is made richer by the fact that each individual’s choices can affect the opportunities available to others. If you decide to eat all of the cake, your roommate cannot decide to eat some too. An equilibrium is an outcome in which each person’s behavior is compatible with the restrictions imposed by everybody else’s behavior. In many situations, it is possible to say both that there is only one possible equilibrium and that there are good reasons to expect that equilibrium to actually come about. This enables the economist to make predictions about the world....

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  • Asset prices are determined by investors’ risk preferences and by the distributions of assets’ risky future payments. Economists refer to these two bases of prices as investor "tastes" and the economy’s "technologies" for generating asset returns. A satisfactory theory of asset valuation must consider how individuals allocate their wealth among assets having different future payments. This chapter explores the development of expected utility theory, the standard approach for modeling investor choices over risky assets....

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  • For decades, researchers have been puzzled by three sets of empirical results associated with the pricing of initial public o¤erings (IPOs). Besides the well-documented underpricing puzzle and hot-issue market puzzle1, severe long-run underperformance of IPOs is reported recently by Ritter (1991) and Loughran and Ritter (1995), suggesting that market ine¢ciency may be even more pervasive than previously recognized. Thus, the IPO market, albeit small in scale, has become a leading example of anomalies against the e¢cient market hypothesis (Fama 1998)....

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  • Included in the SME interest margin charged by banks is an element of price that reflects the probability, from the banks’ experience and data, that some of its SME customers will not be able to repay the debt. The methodology and calculations used to determine the cost associated with the risk of lending are set out under international rules by the Basel Regulatory Framework4 . Regulators also give guidance to banks with regard to the buffers needed to protect banks in the event of shocks to the financial system.

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  • Chapter 3 - Demand, supply, and market equilibrium. This chapter provides an introduction to demand and supply concepts. Both demand and supply are defined and illustrated; determinants of demand and supply are listed and explained. The concept of equilibrium and the effects of changes in demand and supply on equilibrium price and quantity are explained and illustrated. The chapter also includes brief discussions of efficiency (productive and allocative) and price controls (floors and ceilings).

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  • The CAPM rattled investment professionals in the 1960s and its commanding importance still reverberates today." --Dow Jones Asset Management. Nearly 30 years ago, PORTFOLIO THEORY AND CAPITAL MARKETS laid the groundwork for such investment standards as modern portfolio theory, derivatives pricing and investment, and equity index funds, among others.

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  • Empirical evidence regarding international relative prices at the consumer level suggests that arbitrage in international markets is not rapid and that these markets are highly segmented. In fact, even markets for traded goods appear to be highly segmented internationally: In the data, both real exchange rate movements and deviations from the law of one price for traded goods are large and persistent.

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  • In this chapter, we study the mathematical structure of a simple one-period model of a financial market. We consider a finite number of assets. Their initial prices at time t = 0 are known, their future prices at time t = 1 are described as random variables on some probability space. Trading takes place at time t = 0. Already in this simple model, some basic principles of mathematical finance appear very clearly. In Section 1.2, we single out those models which satisfy a condition of market efficiency: There are no trading opportunities which yield a profit without any downside risk.

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  • Overall, our analysis can be understood as one of the first cross-country empirical studies on the determinants of bank fees and as a contribution to the literature testing the contradictory empirical predictions of the SCP and ES hypotheses regarding the influence of concentration on prices in the banking industry.

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  • Bond funds, which accounted for €373 billion of Irish IFs by shares/units in issue, experienced inflows of €12 billion and positive revaluations of €4.2 billion, amid generally increasing bond prices. This continues a longer term trend of significant inflows into bond funds, which comprised 42 per cent of Irish IFs by end-Q3 2012, compared with 24 per cent at end-Q1 2010.

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  • A shift in demand that moves the demand curve to the right causes equilibrium price and quantity to rise. A shift in supply that moves the supply curve to the left causes equilibrium price to rise and equilibrium quantity to fall.

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  • In a symmetric Nash Equilibrium the prices of both goods are randomized in an atomless fashion for the most part of the parameter space apart from the case when the two goods are strongly substitutable in which case the less valuable good is not sold at all. Only when the goods are either independently valued or are substitutes is it feasible that the two prices are randomized independently. When the goods are complements and one of the goods is priced high the other can not be priced in the upper part of its support implying local negative correlation between the two prices.

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  • Equilibrium, the retailers use purely mixed strategies for both prices leading to a price dispersion. If the two goods are complements the prices of the two goods within every shop will be, at least locally, negatively correlated while if they are substitutes or have independent valuations the two prices will be randomized independently. Theoretical literature on multiproduct price competition is relatively scarce. The inherent diculty lies in an ability of consumers to mix and match goods o ered by di erent retailers leading to a complicated pattern of choices.

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  • In discussing equilibrium within the IS-LM model, it has been assumed that –prices are fixed –the supply-side of the economy can be ignored. These assumptions must now be relaxed.

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  • Financial economics plays a far more prominent role in the training of economists than it did even a few years ago. This change is generally attributed to the parallel transformation in capital markets that has occurred in recent years. It is true that trillions of dollars of assets are traded daily in ¯nancial markets|for derivative securities like options and futures, for example|that hardly existed a decade ago. However, it is less obvious how important these changes are. Insofar as derivative securities can be valued by arbitrage, such securities only duplicate primary securities....

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  • Similarly, when the price is below p*, the quantity supplied qs is less than the quantity demanded qd. This causes some buyers to fail to find goods, leading to higher asking prices and higher bid prices by buyers. The tendency for the price to rise is illustrated with the arrows pointing up. The only price which doesn’t lead to price changes is p*, the equilibrium price in which the quantity supplied equals the quantity demanded. The logic of equilibrium in supply and demand is played out daily in markets all over the world, from stock, bond...

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  • Why are we interested in solving simultaneous equations? We often have to find a point which satisfies more than one equation simultaneously, for example when finding equilibrium price and quantity given supply and demand functions.  To be an equilibrium, the point (Q; P) must lie on both the supply and demand curves.  Now both supply and demand curves can be plotted on the same diagram and the point(s) of intersection will be the equilibrium (equilibria)

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  • Chapter 13 Asset Pricing 13.1. Introduction Chapter 8 showed how an equilibrium price system for an economy with complete markets model could be used to determine the price of any redundant asset. That approach allowed us to price any asset whose payoff could be synthesized

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  • This logic, which is illustrated in Figure 2-8, justifies the conclusion that the only equilibrium price is the price in which the quantity supplied equals the quantity demanded. Any other price will tend to rise in a shortage, or fall in a surplus, until supply and demand are balanced. In Figure 2-8, a surplus arises at any price above the equilibrium price p*, because the quantity supplied qs is larger than the quantity demanded qd. The effect of the surplus – leading to sellers with excess inventory – induces price cutting which is...

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