Challenges faced by financial asset pricing models Essay

Challenges faced by financial asset pricing models - strain ExampleEven then these models would serve as a better guide to the market than the lessons taught by a financial ruin. That is a strong savvy for intellectual the challenges faced by the financial asset pricing models, so that these models can be used with discretion to understand the market better. Seen from that angle understanding the correlation between risk and returns, by using a tool, in this case the financial asset pricing models is vital. Any pricing errors would affect the paygrade models, jeopardize value judgments and therefore give rise to incorrect risk assessment.The challenges faced by the asset pricing models are on the rise ascribable to the intermingling of economies receivable to globalization. Along with the increase in challenges the number of critics also increases. These pressures and requirements in turn give rise to new models of financial asset pricing. However the mount of this essay is li mited to the empirical challenges faced by financial asset pricing models.To make a base for this study I start with analyze and contrasting different financial disasters that made headlines in the past with the more recent ones. In the past all the noted failures were either due to deprivation of analytical capacity, absence of systems, error in using models or failure to appreciate risks. The inadequate appreciation of yield curves resulted in S&L bailout. Askin jacket crown management fiasco was as a result of inadequate analytics and Kidder Peaboy tragedy occurred due to the imperfect management risks. In contrast to this is the more recent failures where regular(a) the financial entities known for their efficiencies were dragged to take knee jerk reactions to address huge market dislocations like Russias default and a collapse in liquidity.The problem firmness of purpose capacity of an investor has increased manifold through the years. Powerful machines today help investor s solve problems, which were considered beyond scope, just a few years ago. The right assortment of codes put together (software) by a programmer can have a path breaking consequence on the tallyal capability of an investor. status by side with this technological breakthrough, there is also a reduction in cost of computation and emergence of better financial theories. Todays investors are such(prenominal) more aware of the market conditions and have a greater capacity to analyze and take logical decisions intimately investments due to the availability of different computation methods and real time accessibility to information. But paradoxically usage of these refined method for investment have made the markets more risk prone due to the intermingling of the market in a globalized economy. A direct consequence of this is the rise of common risks. Traditionally investors used to diversify their portfolio in an attempt to beat an alive market risk and they were successful in this due to the difference in risk associated with different securities. But now with the increase in awareness about the different tools with which they can make decisions there is a commonality of reaction to a crisis resulting in potential catastrophes. At the time of a crisis the investors try and rationalize risk by selling their illiquid positions. But since by now the demand for it would go down due o the similar stance all everywhere by the investors, they try to sell their liquid positions no matter which market they are in. Due to this massive movement the market gets