Project Details
Projekt
Flexible Theoretical Models of Intermediary Asset Pricing
Subject Area
Accounting and Finance
Term
since 2021
Project identifier
Deutsche Forschungsgemeinschaft (DFG) - Project number 447617473
The aim of the project is to analyze asset pricing models with intermediaries. These models are characterized by heterogeneous agents, some of whom are subject to investment constraints. In the first funding phase, we dealt with generalizations of a continuous-time base model in policy-relevant directions (e.g., through the introduction of flexible regulation of the financial sector, explicit inclusion of the real economy, or analysis of interactions between different markets). In the second funding phase, we turn to the area of "Demand-based Asset Pricing" (DBAP) both theoretically and empirically. Here, the demand of various investor groups for given securities is modeled as a function of characteristics, and these demand functions are then empirically estimated (under the condition that the demand for securities equals the supply). The fundamental approach by Koijen and Yogo (2019, KY) is based on partially simplifying assumptions, the implications of which we want to investigate through simulation. It is often observed in the empirical work of DBAP models that the unexplained share of demand by the model is relatively high. The controlled simulation environment allows a precise analysis of the result with and without simplifying assumptions and thus a quantitative statement about their impact on the estimated demand. Subsequently, we want to apply the DBAP approach to options as an important asset class. Options are special because the total supply across all market participants must sum to zero. This is a generalization compared to the base model of KY and implies new challenges in modeling. Furthermore, we are interested in a particular feature of options and its implications for DBAP. Options allow for the trading and thus hedging against jump risks, i.e., risks of sudden large (usually negative) price movements, and we want to investigate the valuation of these risks within the DBAP framework. Finally, we want to revisit the model by Kargar (2021), which was central during the first funding phase. Given the unclear empirical results, the question arises whether a better fit to the data can be achieved by varying some components of the model, e.g., by altering preferences (habit instead of recursive utility) or the level of information of the agents (households vs. financial intermediaries). Work on our project is based on close cooperation with other projects of the research unit, and some work packages are implemented directly in collaboration with members of other projects (e.g., the analysis of the DBAP approach for options with the team from A22). Each work package should result in at least one working paper that will be presented at academic conferences and submitted to high-ranking journals.
DFG Programme
Research Units
