Multivariate Tests of a Continuous Time Equilibrium Arbitrage Pricing Theory with Conditional Heteroscadasticity and Jumps
AbstractThis paper uses ML and GMM techniques to estimate systems of stochastic differential equations that describe the behaviour of stock returns. We test restrictions implied by a continuous time asset pricing model that builds on the work of Chamberlain (1988). The stochastic differential equations we estimate allow for mean-reverting stochastic volatility and for jumps of random size, and are therefore consistent with the observation that stock returns exhibit conditional heteroskedasticity and high unconditional kurtosis. We are able to distinguish whether excess kurtosis in returns simply reflects stochastic volatility or whether a satisfactory model requires in addition the inclusion of jump components. We examine whether the joint distribution of stock prices has changed between the two periods 1984 86, and 1987 89, and find that while the persistence in variance seemed to become somewhat less important, jumps in stock prices became more important.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9211.
Length: 41 pages
Date of creation: 1992
Date of revision:
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Web page: http://www.econ.cam.ac.uk/index.htm
pricing ; economic models;
Other versions of this item:
- Mun S. Ho & William R. M. Perraudin & Bent E. Sørensen, . "Multivariate Tests of a Continuous Time Equilibrium Arbitrage Pricing Theory with Conditional Heteroskedasticity and Jumps," Discussion Papers 92-03, University of Copenhagen. Department of Economics.
- Mun S Ho & William R M Perraudin & Bent E Sorensen, 1992. "Multivariate Tests of a Continuous Time Equilibrium Arbitrage Pricing Theory with Conditional Heteroskedasticity and Jumps," CEPR Financial Markets Paper 0024, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
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