An Overview of Asset Pricing
I am back from from a couple of days' hard work preparing and presenting for a case competition at the Copenhagen Business School. Luckily my group's endeavors were not useless as we managed to claw first place and thus a pretty nice prize too :). As such, it has indeed been some pretty tough days but also, as it turns out, pretty happy ones as well. However, we of course need to get back into it and on that note I want to present a recent paper from the BIS for you (get PDF here) by Peter Hördahl and Frank Packer. The paper reviews analytical works and comments from the Autumn Meeting of Central Bank Economists on “Understanding asset prices: determinants and policy implications”, which was hosted by the BIS on 30–31 October 2006. Here is the abstract.
This paper reviews analytical work carried out by central banks that participated at the Autumn Meeting of Central Bank Economists on “Understanding asset prices: determinants and policy implications”, which the BIS hosted on 30–31 October 2006. The paper first discusses some general properties of asset prices, focusing on volatilities and co-movements. It then reviews studies that look at determinants of asset prices and that attempt to estimate a fair value of assets. The next part of the paper focuses on research that aims at measuring the impact of changes in asset wealth on the real economy. It then goes on to discuss how central banks use information from asset prices to develop indicators of market expectations that are useful for monetary policy purposes. Finally, the paper reviews central banks’ views on whether monetary policy should react in a direct way to asset price developments.
The paper is an excellent read and a real 'must read' for students and practioners of economics and finance. In particular, for applied studies I think that it would serve as a most useful intro. Note of course the list of references and the extensive review of the existing literature which constitutes a real treasure trove of sources and info. Specifically I found the section on real estate/house price determination much inspiring as well as the small brief on asset prices and consumer spending also is much worthwhile. The paper is an easy read and as such you should definitely spent an hour or so with this one.