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A Continuous-Time Arbitrage-Pricing Model with Stochastic Volatility and Jumps

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Author Info

  • Ho, Mun S
  • Perraudin, William R M
  • Sorensen, Bent E

Abstract

The authors formulate and test a continuous time asset pricing model using U.S. equity market data. They assume that stock returns are driven by common factors including random jump-size Poisson processes and Brownian motions with stochastic volatility. The model places over-identifying restrictions on the mean returns allowing one to identify risk neutral probability distributions useful in pricing derivative securities. The authors test for the restrictions and decompose moments of the asset returns into the contributions made by different factors. Their econometric methods take full account of time aggregation.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 14 (1996)
Issue (Month): 1 (January)
Pages: 31-43

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Handle: RePEc:bes:jnlbes:v:14:y:1996:i:1:p:31-43

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Cited by:
  1. Christoffersen, Peter & Jacobs, Kris & Ornthanalai, Chayawat, 2012. "Dynamic jump intensities and risk premiums: Evidence from S&P500 returns and options," Journal of Financial Economics, Elsevier, vol. 106(3), pages 447-472.
  2. Meddahi, N., 2001. "An Eigenfunction Approach for Volatility Modeling," Cahiers de recherche 2001-29, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
  3. Bates, David S., 2008. "The market for crash risk," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2291-2321, July.
  4. David S. Bates, 2001. "The Market for Crash Risk," NBER Working Papers 8557, National Bureau of Economic Research, Inc.
  5. Michael Rockinger & Maria Semenova, 2005. "Estimation of Jump-Diffusion Process vis Empirical Characteristic Function," FAME Research Paper Series rp150, International Center for Financial Asset Management and Engineering.
  6. Robert Tompkins, 2006. "Why Smiles Exist in Foreign Exchange Options Markets: Isolating Components of the Risk Neutral Process," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 583-603.
  7. Mikhail Chernov & A. Ronald Gallant & Eric Ghysels & George Tauchen, 1999. "A New Class of Stochastic Volatility Models with Jumps: Theory and Estimation," CIRANO Working Papers 99s-48, CIRANO.
  8. George J. Jiang & Pieter J. van der Sluis, 1998. "Pricing Stock Options under Stochastic Volatility and Stochastic Interest Rates with Efficient Method of Moments Estimation," Tinbergen Institute Discussion Papers 98-067/4, Tinbergen Institute.
  9. repec:dgr:uvatin:2098067 is not listed on IDEAS

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