Re:The Rate of Return on Everything, 1870–2015 [pdf]
by FabHK on Friday January 05, 2018 @07:12PM
(#16082910)
It's really not.
Judging from your mentioning MC and binomial walks, you might be looking at derivative pricing, and be confused by the facts that
- derivatives are zero-net-supply securities, thus they returns are necessarily zero-sum (minus the exchange/bank's cut)
- derivatives can be priced using the risk neutral measure (after a change of measure, Girsanov's theorem, yada yada yada) in which mu, the drift of all risky assets, equals r, the risk-free rate. However, that's not statement about how mu is in the real world, but basically an abbreviation for an arbitrage-by-replication argument.
At any rate, derivatives pricing is the domain of arbitrage pricing models, while here we are looking at equilibrium models (which consider investors' preferences/utility, unlike arb models).
Judging from your mentioning MC and binomial walks, you might be looking at derivative pricing, and be confused by the facts that
- derivatives are zero-net-supply securities, thus they returns are necessarily zero-sum (minus the exchange/bank's cut)
- derivatives can be priced using the risk neutral measure (after a change of measure, Girsanov's theorem, yada yada yada) in which mu, the drift of all risky assets, equals r, the risk-free rate. However, that's not statement about how mu is in the real world, but basically an abbreviation for an arbitrage-by-replication argument.
At any rate, derivatives pricing is the domain of arbitrage pricing models, while here we are looking at equilibrium models (which consider investors' preferences/utility, unlike arb models).