Can a Well-Fitted Equilibrium Asset-Pricing Model Produce Mean Reversion?
AbstractIn recent papers, Cecchetti et al (1990) and Kandel and Stambaugh (1990) showed that negative serial correlation in long horizon returns was consistent with an equilibrium model of asset pricing. In this paper we show that their results rely on misspecified Markov switching models for the endowment process. Once the proper Markov specification is chosen for the endowment process, the model does not produce mean reversion of the magnitude detected in the data. Furthermore, the small amount of mean reversion produced by the model is due only to small sample bias. We also show that this model is unable to predict negative excess returns, contrary to empirical evidence. Copyright 1994 by John Wiley & Sons, Ltd.
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Bibliographic InfoArticle provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.
Volume (Year): 9 (1994)
Issue (Month): 1 (Jan.-March)
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Web page: http://www.interscience.wiley.com/jpages/0883-7252/
Other versions of this item:
- Bonomo, m. & Garcia, r., 1991. "Can Well-Fitted Equilibrium Asset Pricing Model Produce Mean Reversion?," Cahiers de recherche 9127, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Bonomo, m. & Garcia, r., 1991. "Can Well-Fitted Equilibrium Asset Pricing Model Produce Mean Reversion?," Cahiers de recherche 9127, Universite de Montreal, Departement de sciences economiques.
- MArco Antonio Bonomo & Rene Garcia, 1992. "Can a well-fitted equilibrium asset pricing model produce mean reversion?," Textos para discussÃ£o 270, Department of Economics PUC-Rio (Brazil).
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- Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2004.
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- Martin Lettau & Sydney C. Ludvigson, 2004. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," 2004 Meeting Papers 644, Society for Economic Dynamics.
- Moore, Bartholomew & Schaller, Huntley, 1996.
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- Bartholomew Moore & Huntley Schaller, 1997. "Learning, Regime Switches, and Equilibrium Asset Pricing Dynamics," Departmental Working Papers 199501, Rutgers University, Department of Economics.
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