Chapter 42 Asset Pricing

Abstract

Publisher This chapter focuses on the process of asset pricing. In field studies, it is customary to reject the random walk theory by identifying drift in prices. The drift is to be explained in terms of compensation for risk using some equilibrium asset pricing model. An alternative would be to view drift as evidence that equilibration forces are at work, verify whether the drift points in the direction of a given asset pricing equilibrium, and whether it eventually leads markets to this equilibrium. In the experiments discussed in this chapter, the data can best be understood in this fashion. Experiments make it easier to identify the forces of equilibrium asset pricing theory, because alm..