Advanced Search
MyIDEAS: Login to save this paper or follow this series

General Properties of Rational Stock-Market Fluctuations

Contents:

Author Info

  • Mele, Antonio

    (The London School of Economics and Political Science)

Abstract

Which pricing kernel restrictions are needed to make low dimensional Markov models consistent with given sets of predictions on aggregate stock-market fluctuations? This paper develops theoretical test conditions addressing this and related reverse engineering issues arising within a fairly general class of long-lived asset pricing models. These conditions solely affect the first primitives of the economy (probabilistic descriptions of the world, information structures, and preferences). They thus remove some of the arbitrariness related to the specification of theoretical models involving unobserved variables, state-dependent preferences, and incomplete markets.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ihs.ac.at/publications/eco/es-153.pdf
File Function: First version, 2004
Download Restriction: no

Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 153.

as in new window
Length: 50 pages
Date of creation: Mar 2004
Date of revision:
Handle: RePEc:ihs:ihsesp:153

Contact details of provider:
Postal: Stumpergasse 56, A-1060 Vienna, Austria
Phone: ++43 - (0)1 - 599 91 - 0
Fax: ++43 - (0)1 - 599 91 - 555
Web page: http://www.ihs.ac.at
More information through EDIRC

Order Information:
Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria

Related research

Keywords: Pricing kernel restrictions; Convexity; Equilibrium volatility;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Abel, Andrew B, 1994. "Exact Solutions for Expected Rates of Return under Markov Regime Switching: Implications for the Equity Premium Puzzle," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 26(3), pages 345-61, August.
  2. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  3. Marc Romano & Nizar Touzi, 1997. "Contingent Claims and Market Completeness in a Stochastic Volatility Model," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 7(4), pages 399-412.
  4. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, American Finance Association, vol. 44(5), pages 1115-53, December.
  5. Abel, Andrew B., 1999. "Risk premia and term premia in general equilibrium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(1), pages 3-33, February.
  6. Basak, Suleyman & Cuoco, Domenico, 1998. "An Equilibrium Model with Restricted Stock Market Participation," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 309-41.
  7. Kogan, Leonid & Uppal, Raman, 2002. "Risk Aversion and Optimal Portfolio Policies in Partial and General Equilibrium Economies," CEPR Discussion Papers 3306, C.E.P.R. Discussion Papers.
  8. Bajeux, I. & Rochet, J.C., 1994. "Dynamic Spanning: Are Options an Appropriate Instrument?," Papers, Toulouse - GREMAQ 94.329, Toulouse - GREMAQ.
  9. Nicole El Karoui & Monique Jeanblanc-Picquè & Steven E. Shreve, 1998. "Robustness of the Black and Scholes Formula," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 8(2), pages 93-126.
  10. Andrew Abel, . "Stock Prices Under Time-Varying Dividend Risk: An Exact Solution in an Infinite-Horizon General Equilibrium Model," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 15-88, Wharton School Rodney L. White Center for Financial Research.
  11. Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(2), pages 249-82, April.
  12. Yaacov Z. Bergman & Bruce D. Grundy & Zvi Wiener, . "General Properties of Option Prices (Revision of 11-95) (Reprint 058)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 01-96, Wharton School Rodney L. White Center for Financial Research.
  13. Andrew B. Abel, 1991. "The equity premium puzzle," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-14.
  14. Jagannathan, Ravi, 1984. "Call options and the risk of underlying securities," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(3), pages 425-434, September.
  15. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
  16. Masaaki Kijima, 2002. "Monotonicity And Convexity Of Option Prices Revisited," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 12(4), pages 411-425.
  17. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 107(2), pages 205-251, April.
  18. Barsky, Robert B & De Long, J Bradford, 1993. "Why Does the Stock Market Fluctuate?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(2), pages 291-311, May.
  19. Brennan, Michael & Wang, Ashley W & Xia, Yihong, 2003. "Estimation and Test of a Simple Model of Intertemporal Capital Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management, Anderson Graduate School of Management, UCLA qt20r0j5t8, Anderson Graduate School of Management, UCLA.
  20. Antonio Mele, 2003. "Fundamental Properties of Bond Prices in Models of the Short-Term Rate," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 679-716, July.
  21. Ahn, Dong-Hyun & Gao, Bin, 1999. "A Parametric Nonlinear Model of Term Structure Dynamics," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 721-62.
  22. Pietro Veronesi, 2000. "How Does Information Quality Affect Stock Returns?," Journal of Finance, American Finance Association, American Finance Association, vol. 55(2), pages 807-837, 04.
  23. Malkiel, Burton G, 1979. "The Capital Formation Problem in the United States," Journal of Finance, American Finance Association, American Finance Association, vol. 34(2), pages 291-306, May.
  24. Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(1), pages 1-47, February.
  25. Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, Finance Press, number ovsv.
  26. Detemple, Jerome B, 1986. " Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, American Finance Association, American Finance Association, vol. 41(2), pages 383-91, June.
  27. John Y. Campbell, 1998. "Asset Prices, Consumption, and the Business Cycle," NBER Working Papers 6485, National Bureau of Economic Research, Inc.
  28. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  29. He, Hua & Leland, Hayne, 1993. "On Equilibrium Asset Price Processes," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 593-617.
  30. Bergman, Yaacov Z & Grundy, Bruce D & Wiener, Zvi, 1996. " General Properties of Option Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 51(5), pages 1573-1610, December.
  31. Barsky, Robert B. & Long, J. Bradford De, 1990. "Bull and Bear Markets in the Twentieth Century," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 50(02), pages 265-281, June.
  32. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Clark, 1991. "The Equity Premium and the Risk Free Rate: Matching the Moments," NBER Working Papers 3752, National Bureau of Economic Research, Inc.
  33. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  34. Gennotte, Gerard, 1986. " Optimal Portfolio Choice under Incomplete Information," Journal of Finance, American Finance Association, American Finance Association, vol. 41(3), pages 733-46, July.
  35. David, Alexander, 1997. "Fluctuating Confidence in Stock Markets: Implications for Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(04), pages 427-462, December.
  36. Robert Goldstein & Fernando Zapatero, 1996. "General Equilibrium With Constant Relative Risk Aversion And Vasicek Interest Rates," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(3), pages 331-340.
  37. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  38. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
  39. Veronesi, Pietro, 1999. "Stock Market Overreaction to Bad News in Good Times: A Rational Expectations Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 975-1007.
  40. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  41. Brennan, Michael J. & Xia, Yihong, 2001. "Stock price volatility and equity premium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 249-283, April.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ihs:ihsesp:153. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Doris Szoncsitz).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.