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Modeling Asset Returns : A Comparison of Theoretical and Empirical Models

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Author Info
Lüders, Erik
Schröder, Michael
Abstract

This paper presents and compares several time-series models for returns of broadbased stock indices. These models nest a nonlinear asymmetric GARCH (NGARCH) model as a special case. Some of these models are empirically motivated ad-hoc specifications others are derived from a representative investor economy with HARA-utility and some are behavioral, i.e. are based on recent findings in behavioral finance. To compare these models we use the inflation adjusted MSCI total return indices of 5 large economies, USA, United Kingdom, Germany, France and Japan. The empirical results show that although the pure NGARCH model performs well, the estimation for two indices could be significantly improved by an extension which follows from the representative investor model with HARA-utility. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 04-19.

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Date of creation: 2004
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Handle: RePEc:zbw:zewdip:1849

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Related research
Keywords: asset pricing; HARA-utility function; behavioral finance; NGARCHin-mean;

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  2. Lüders, Erik & Peisl, Bernhard, 2001. "How do investors' expectations drive asset prices?," ZEW Discussion Papers 01-15, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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  15. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
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  18. Rubinstein, Mark, 1983. " Displaced Diffusion Option Pricing," Journal of Finance, American Finance Association, vol. 38(1), pages 213-17, March. [Downloadable!] (restricted)
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