Cost minimization and asset pricing

Robert G. Chambers and John Quiggin

No 151170, Risk and Sustainable Management Group Working Papers from University of Queensland, School of Economics

Abstract: A cost-based approach to asset-pricing equilibrium relationships is developed. A cost function induces a stochastic discount factor (pricing kernel) that is a function of random output, prices, and capital stockt. By eliminating opportunities for arbitrage between financial markets and the production technology, firms minimize the current cost of future consumption. The first-order conditions for this cost minimization problem generate the stochastic discount factor. The cost-based approach is dual in nature and determines state-claim prices as the current-period marginal cost of increasing future stochastic output. A cost-based pricing kernel is estimated using annual time-series data on macroeconomic variables and returns data

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 29
Date: 2005
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Citations: View citations in EconPapers (2)

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Working Paper: Cost Minimization and Asset Pricing (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uqsers:151170

DOI: 10.22004/ag.econ.151170

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