Empirical asset pricing with nonlinear risk premia
AbstractIn this paper we introduce a simple continuous-time asset pricing framework, based on general multi-dimensional diffusion processes, that combines semi-analytic pricing with a nonlinear specification for the market price of risk. Our framework guarantees existence of weak solutions of the nonlinear SDEs under the physical measure, thus allowing to work with nonlinear models for the real world dynamics not considered in the literature so far. It emerges that the additional flexibility in the time series modelling is econometrically relevant: a nonlinear stochastic volatility diffusion model for the joint time series of the S&P 100 and the VXO implied volatility index data shows superior forecasting power over the standard specifications for implied and realized variance forecasting.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 0911.0928.
Date of creation: Nov 2009
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Web page: http://arxiv.org/
Other versions of this item:
- Aleksandar Mijatovic & Paul Schneider, 2009. "Empirical Asset Pricing with Nonlinear Risk Premia," Working Papers wp09-03, Warwick Business School, Financial Econometrics Research Centre.
- NEP-ALL-2009-11-14 (All new papers)
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