2012•Encyclopedia of Financial ModelsRequires access

General Principles of Asset Pricing

Guofu Zhou, Frank J. Fabozzi

Abstract

Asset pricing is mainly about transforming asset payoffs into prices. The most important principles of valuation are no-arbitrage, law of one price, and linear positive state pricing. These principles imply asset prices are linearly related to their discounted payoffs in which the stochastic discount factor is a function of investors’ risk tolerance and economy-wide risks. The arbitrage pricing theory, the capital asset pricing model, and the consumption asset pricing model, among others, are special cases of the discount factor models.

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Key concepts: Arbitrage pricing theory, Stochastic discount factor, Consumption-based capital asset pricing model, Rational pricing, Capital asset pricing model, Investment theory, Economics, Valuation (finance)