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Econometric Asset Pricing Modelling

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  • Bertholon, H.
  • Monfort, A.
  • Pegoraro, F.

Abstract

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 (R.N.) 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 Risk-Neutral 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 Risk-Neutral Constrained Direct Modelling and of the Back Modelling approaches, both allowing to conciliate a flexible (non-Car) historical dynamics and a Car R.N. 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 R.N. factor dynamics with tractable pricing formulas. This result is based on the notion of (Risk-Neutral) Extended Car process that we introduce in the paper, and which allows to deal with sophisticated models like Gaussian and Inverse Gaussian GARCH-type models with regime-switching, or Wishart Quadratic Term Structure models.

Suggested Citation

  • Bertholon, H. & Monfort, A. & Pegoraro, F., 2008. "Econometric Asset Pricing Modelling," Working papers 223, Banque de France.
  • Handle: RePEc:bfr:banfra:223
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    References listed on IDEAS

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    Cited by:

    1. Badescu, Alex & Elliott, Robert J. & Siu, Tak Kuen, 2009. "Esscher transforms and consumption-based models," Insurance: Mathematics and Economics, Elsevier, vol. 45(3), pages 337-347, December.
    2. Monfort, Alain & Pegoraro, Fulvio, 2012. "Asset pricing with Second-Order Esscher Transforms," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1678-1687.
    3. Matthias R. Fengler & Helmut Herwartz & Christian Werner, 2012. "A Dynamic Copula Approach to Recovering the Index Implied Volatility Skew," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 10(3), pages 457-493, June.
    4. Aleksandar Mijatovic & Paul Schneider, 2009. "Empirical Asset Pricing with Nonlinear Risk Premia," Working Papers wp09-03, Warwick Business School, Finance Group.
    5. Rombouts, Jeroen V.K. & Stentoft, Lars, 2015. "Option pricing with asymmetric heteroskedastic normal mixture models," International Journal of Forecasting, Elsevier, vol. 31(3), pages 635-650.
    6. Rombouts, Jeroen V.K. & Stentoft, Lars, 2014. "Bayesian option pricing using mixed normal heteroskedasticity models," Computational Statistics & Data Analysis, Elsevier, vol. 76(C), pages 588-605.
    7. Alain Monfort & Jean-Paul Renne, 2011. "Credit and Liquidity Risks in Euro-area Sovereign Yield Curves," Working Papers 2011-26, Center for Research in Economics and Statistics.
    8. Corsi, Fulvio & Fusari, Nicola & La Vecchia, Davide, 2013. "Realizing smiles: Options pricing with realized volatility," Journal of Financial Economics, Elsevier, vol. 107(2), pages 284-304.
    9. Chevallier, Julien & Ielpo, Florian & Mercier, Ludovic, 2009. "Risk aversion and institutional information disclosure on the European carbon market: A case-study of the 2006 compliance event," Energy Policy, Elsevier, vol. 37(1), pages 15-28, January.
    10. Alain Monfort & Jean-Paul Renne, 2013. "Default, Liquidity, and Crises: an Econometric Framework," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 11(2), pages 221-262, March.
    11. Yow-Jen Jou & Chih-Wei Wang & Wan-Chien Chiu, 2013. "Is the realized volatility good for option pricing during the recent financial crisis?," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 171-188, January.
    12. Alain Monfort & Olivier Féron, 2012. "Joint econometric modeling of spot electricity prices, forwards and options," Review of Derivatives Research, Springer, vol. 15(3), pages 217-256, October.
    13. Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2015. "A Quadratic Kalman Filter," Journal of Econometrics, Elsevier, vol. 187(1), pages 43-56.
    14. Massimo Guidolin, 2013. "Markov switching models in asset pricing research," Chapters,in: Handbook of Research Methods and Applications in Empirical Finance, chapter 1, pages 3-44 Edward Elgar Publishing.
    15. Timothy M. Christensen, 2014. "Nonparametric identification of positive eigenfunctions," CeMMAP working papers CWP37/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    16. Da Fonseca José & Grasselli Martino & Ielpo Florian, 2014. "Estimating the Wishart Affine Stochastic Correlation Model using the empirical characteristic function," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(3), pages 1-37, May.
    17. Massimo Guidolin, 2011. "Markov Switching Models in Empirical Finance," Working Papers 415, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    18. Renne, J-P., 2009. "Frequency-domain analysis of debt service in a macro-finance model for the euro area," Working papers 261, Banque de France.

    More about this item

    Keywords

    Direct Modelling ; Risk-Neutral Constrained Direct Modelling ; Back Modelling; Internal Consistency Conditions (ICCs) ; identification problem; Car and Extended Car processes ; Laplace Transform.;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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