New Insights From the Derivation of the Rationality of the Requirement of a Pricing Martingale From Ënativeíprinciples of Asset Pricing

Modeling the native properties and pricing implications of risk preferences, and explicitly imposing portfolio theory, this study arrives at the rationalization of several risk-return anomalies and some new insights. First, study findings rationalize the phenomenon, to wit, stable realizations of market betas are associated with high returns. Second, study findings rationalize the directly dichotomous phenomenon, namely the association of high market betas with relatively low returns. Third, the value-growth anomaly is shown not to be inconsistent with rational expectations. Fourth, study findings show off-equilibrium states of the world are parameterized by the materiality of `unhedged cash flow risk', and that in those states of the world, alongside market risk, idiosyncratic risk is priced. Fifth, contrary to prior studies within which pricing martingales are self perturbing, the demand for a pricing martingale is induced by the feasibility, simultaneously of either of equilibrium or off-equilibrium states in future periods. With market risk premiums concave (respectively, strictly convex) in market risk in the equilibrium (respectively, off-equilibrium) states, asset pricing embeds, endogenously `jumps' between two `different', yet complementary asset pricing kernels. In stated respect, as is ideal, feasibly the two kernels coexist within different segments of a market