Price and Payoff Autocorrelations in a Multi-period Consumption-Based Asset Pricing Model

Abstract

This paper considers common consumption-based asset pricing model and derives approximations of the basic pricing equation that describes mutual dependence of the mean price "to-day", mean payoff "next-day", price and payoff volatility and impact of the price and payoff autocorrelations. The deep conjunction of the consumption-based model with other modifications of asset pricing as ICAPM, APM and etc. (Cochrane, 2001) causes that our results can be derived in other versions of CAPM. We introduce the market-based price averaging and discuss the origin of its distinctions from the common frequency-based price probability. The market-based price statistical moments, price volatility and autocorrelation are determined by statistical moments of the random market trade value and volume. Distinctions between the frequency-based and the market-based approaches to price averaging cause different assessment of the price volatility and autocorrelation and result in different treatment of the price-volume relations in particular. The market-based price averaging provides direct dependence of the price statistical moments on the market trade value and volume statistical moments. It establishes a unified ground for description of financial markets but uncovers tough complexity. The usage of the frequency-based or proposed market-based price averaging is completely determined by agent's preferences, beliefs and habits. The collision between 'rational' market-based approach and "soulful" or "home-felt" frequency-based approach to price averaging creates significant challenge for financial theory.