Estimation of Continuous Time Models for Stock Returns and Interest Rates
The paper uses and extends the Efficient Method of Moments (EMM) technique to estimate and test continuous time diffusion models for stock returns and interest rates. The EMM technique, developed in previous papers by Gallatn and Tauchen along with various collaborators, is a simulation-based method that uses the score function of an auxiliary model as the criterion to define a generlized method of moments (GMM) objective function. The technique is sufficiently general and computationally tractable to handle multivariate diffusions where the state vector is not completely observed. The application to stock returns finds that a four-factor diffusion model with one observed variable can account for the dynamics of the daily return on the S&P Composite Index, 1927-1987. This finding stands in contrast to previous empirical results indicating that discrete-time stochastic volatility models are incapable of explaining the dynamics of the stock return. The application to interest rates involves fitting a three-factor model ot a weekly, 1962-1995, term structure data setcomoprised sorth of (3 month), medium (12 month), and long (10 year) Treasury rates. The Yield-Factor Model is sharply rejected, though extensions that permit convexities in the local variance function come much closer to fitting the data. While not directly undertaking in the paper, applications involving pricing of derivatives could make use of the estimated diffusion models for stock returns adn interest rates.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||1995|
|Date of revision:|
|Publication status:||Published in MACROECONOMIC DYNAMICS, Vol. 1, 1997, pages 135-168.|
|Contact details of provider:|| Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097|
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/
When requesting a correction, please mention this item's handle: RePEc:duk:dukeec:95-53. 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: (Department of Economics Webmaster)
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.