Maximum Likelihood Estimation of Generalized Itô Processes with Discretely Sampled Data
AbstractIn this paper, it is shown that risk aversion plays a critical role in the determination of the equilibrium stock prices and their variability in a one-asset pure exchange economy. Specifically, it is argued that the variance of equilibrium stock prices is a strictly increasing convex function of the Arrow-Pratt measure of relative risk aversion, g, if g is greater than one. Furthermore, it is shown that the inequality underlying variance bounds tests can be reversed in our model with risk aversion. Therefore, it is concluded that the high volatility of stock prices relative to dividends may imply a rejection of risk neutrality rather than a failure of stock market efficiency.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Econometric Theory.
Volume (Year): 4 (1988)
Issue (Month): 02 (August)
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Other versions of this item:
- Andrew W. Lo, . "Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data," Rodney L. White Center for Financial Research Working Papers 15-86, Wharton School Rodney L. White Center for Financial Research.
- Andrew W. Lo, 1986. "Maximum Likelihood Estimation of Generalized Ito Processes with Discretely Sampled Data," NBER Technical Working Papers 0059, National Bureau of Economic Research, Inc.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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