Can a well-fitted equilibrium asset pricing model produce mean reversion?
In recent papers, Cecchetti et al (1990) and Kandel and Stambaugh (1990) showed that negative serial correlation in long horizon returns was consistent with an equilibrium model of asset pricing. In this paper we show that their results rely on misspecified Markov switching models for the endowment process. Once the proper Markov specification is chosen for the endowment process, the model does not produce mean reversion of the magnitude detected in the data. Furthermore, the small amount of mean reversion produced by the model is due only to small sample bias. We also show that this model is unable to predict negative excess returns, contrary to empirical evidence. Copyright 1994 by John Wiley & Sons, Ltd.
(This abstract was borrowed from another version of this item.)
|Date of creation:||Jan 1992|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: 021 35271078
Fax: 021 35271084
Web page: http://www.econ.puc-rio.br
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:rio:texdis:270. 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: ()
If references are entirely missing, you can add them using this form.