The purpose of this paper is to propose a general econometric approach to no-arbitrage asset pricing modelling based on three main ingredients: (i) the historical discrete-time dynamics of the factor representing the information, (ii) the stochastic discount factor (SDF), and (iii) the discrete-time risk-neutral (RN) factor dynamics. Retaining an exponential-affine specification of the SDF, its modelling is equivalent to the specification of the risk-sensitivity vector and of the short rate, if the latter is neither exogenous nor a known function of the factor. In this general framework, we distinguish three modelling strategies: the direct modelling, the RN constrained direct modelling, and the back modelling. In all the approaches, we study the internal consistency conditions (ICCs), implied by the absence of arbitrage opportunity assumption, and the identification problem. The general modelling strategies are applied to two important domains: security market models and term structure of interest rates models. In these contexts, we stress the usefulness (and we suggest the use) of the RN constrained direct modelling and of the back modelling approaches, both allowing us to conciliate a flexible (non-Car) historical dynamics and a Car (compound autoregressive) RN dynamics leading to explicit or quasi-explicit pricing formulas for various derivative products. Moreover, we highlight the possibility to specify asset pricing models able to accommodate non-Car historical and non-Car RN factor dynamics with tractable pricing formulas. This result is based on the notion of (RN) extended Car process that we introduce in the paper, and which allows us to deal with sophisticated models such as Gaussian and inverse Gaussian GARCH-type models with regime-switching, or Wishart quadratic term structure models. Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
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Paper
Henri Bertholon ; Alain Monfort ; Fulvio Pegoraro, 2007.
"Econometric Asset Pricing Modelling,"
Working Papers
2007-18, Centre de Recherche en Economie et Statistique, revised 2007.
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Christian Gourieroux ; Alain Monfort ; Vassilis Polimenis, 2005.
"Affine Model for Credit Risk Analysis,"
Working Papers
2005-44, Centre de Recherche en Economie et Statistique, revised 2005.
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