Empirical Dynamic Asset Pricing

by Singleton, Kenneth J.

• ISBN13: 9780691122977
• ISBN10: 0691122970
• Format: Hardcover
• Copyright: 2006-03-06
• Publisher: Princeton Univ Pr

Summary

Written by one of the leading experts in the field, this book focuses on the interplay between model specification, data collection, and econometric testing of dynamic asset pricing models. The first several chapters provide an in-depth treatment of the econometric methods used in analyzing financial time-series models. The remainder explores the goodness-of-fit of preference-based and no-arbitrage models of equity returns and the term structure of interest rates; equity and fixed-income derivatives prices; and the prices of defaultable securities. Singleton addresses the restrictions on the joint distributions of asset returns and other economic variables implied by dynamic asset pricing models, as well as the interplay between model formulation and the choice of econometric estimation strategy. For each pricing problem, he provides a comprehensive overview of the empirical evidence on goodness-of-fit, with tables and graphs that facilitate critical assessment of the current state of the relevant literatures. As an added feature, Singleton includes throughout the book interesting tidbits of new research. These range from empirical results (not reported elsewhere, or updated from Singleton's previous papers) to new observations about model specification and new econometric methods for testing models. Clear and comprehensive, the book will appeal to researchers at financial institutions as well as advanced students of economics and finance, mathematics, and science.

Author Biography

Kenneth J. Singleton is Adams Distinguished Professor of Management and Senior Associate Dean for Academic Affairs at the Graduate School of Business, Stanford University.

Table of Contents

Preface	p. xi
Acknowledgments	p. xiii
Introduction	p. 1
Model Implied Restrictions	p. 3
Econometric Estimation Strategies	p. 10
Econometric Methods for Analyzing DAPMs	p. 15
Model Specification and Estimation Strategies	p. 17
Full Information about Distributions	p. 17
No Information about the Distribution	p. 21
Limited Information: GMM Estimators	p. 25
Summary of Estimators	p. 34
Large-Sample Properties of Extremum Estimators	p. 35
Basic Probability Model	p. 35
Consistency: General Considerations	p. 39
Consistency of Extremum Estimators	p. 44
Asymptotic Normality of Extremum Estimators	p. 48
Distributions of Specific Estimators	p. 53
Relative Efficiency of Estimators	p. 60
Goodness-of-Fit and Hypothesis Testing	p. 71
GMM Tests of Goodness-of-Fit	p. 71
Testing Restrictions on [theta subscript 0]	p. 77
Comparing LR, Wald, and LM Tests	p. 84
Inference for Sequential Estimators	p. 86
Inference with Unequal-Length Samples	p. 88
Underidentified Parameters under H[subscript 0]	p. 94
Affine Processes	p. 98
Affine Processes: Overview	p. 100
Continuous-Time Affine Processes	p. 101
Discrete-Time Affine Processes	p. 108
Transforms for Affine Processes	p. 114
GMM Estimation of Affine Processes	p. 117
ML Estimation of Affine Processes	p. 118
Characteristic Function-Based Estimators	p. 124
Simulation-Based Estimators of DAPMs	p. 130
Introduction	p. 130
SME: The Estimation Problem	p. 132
Consistency of the SME	p. 135
Asymptotic Normality of the SME	p. 142
Extensions of the SME	p. 144
Moment Selection with SME	p. 146
Applications of SME to Diffusion Models	p. 152
Markov Chain Monte Carlo Estimation	p. 153
Stochastic Volatility, Jumps, and Asset Returns	p. 158
Preliminary Observations about Shape	p. 159
Discrete-Time Models	p. 164
Estimation of Discrete-Time Models	p. 171
Continuous-Time Models	p. 174
Estimation of Continuous-Time Models	p. 179
Volatility Scaling	p. 185
Term Structures of Conditional Skewness and Kurtosis	p. 187
Pricing Kernels, Preferences, and DAPMs	p. 193
Pricing Kernels and DAPMs	p. 195
Pricing Kernels	p. 195
Marginal Rates of Substitution as q*	p. 198
No-Arbitrage and Risk-Neutral Pricing	p. 202
Linear Asset Pricing Models	p. 211
Economic Motivations for Examining Asset Return Predictability	p. 211
Market Microstructure Effects	p. 214
A Digression on Unit Roots in Time Series	p. 219
Tests for Serial Correlation in Returns	p. 224
Evidence on Stock-Return Predictability	p. 231
Time-Varying Expected Returns on Bonds	p. 237
Consumption-Based DAPMs	p. 246
Empirical Challenges Facing DAPMs	p. 247
Assessing Goodness-of-Fit	p. 251
Time-Separable Single-Good Models	p. 254
Models with Durable Goods	p. 260
Habit Formation	p. 265
Non-State-Separable Preferences	p. 274
Other Preference-Based Models	p. 276
Bounds on the Volatility of m[superscript n subscript t]	p. 277
Pricing Kernels and Factor Models	p. 282
A Single-Beta Representation of Returns	p. 283
Beta Representations of Excess Returns	p. 285
Conditioning Down and Beta Relations	p. 287
From Pricing Kernels to Factor Models	p. 290
Methods for Testing Beta Models	p. 297
Empirical Analyses of Factor Models	p. 302
No-Arbitrage DAPMs	p. 309
Models of the Term Structure of Bond Yields	p. 311
Key Ingredients of a DTSM	p. 312
Affine Term Structure Models	p. 316
Continuous-Time Affine DTSMs	p. 317
Discrete-Time Affine DSTMs	p. 327
Quadratic-Gaussian Models	p. 329
Nonaffine Stochastic Volatility Models	p. 331
Bond Pricing with Jumps	p. 332
DTSMs with Regime Shifts	p. 334
Empirical Analyses of Dynamic Term Structure Models	p. 338
Estimation of DTSMs	p. 338
Empirical Challenges for DTSMs	p. 344
DTSMs of Swap and Treasury Yields	p. 348
Factor Interpretations in Affine DTSMs	p. 356
Macroeconomic Factors and DTSMs	p. 359
Term Structures of Corporate Bond Spreads	p. 364
DTSMs of Defaultable Bonds	p. 364
Parametric Reduced-Form Models	p. 369
Parametric Structural Models	p. 371
Empirical Studies of Corporate Bonds	p. 373
Modeling Interest Rate Swap Spreads	p. 383
Pricing Credit Default Swaps	p. 384
Is Default Risk Priced?	p. 387
Equity Option Pricing Models	p. 391
No-Arbitrage Option Pricing Models	p. 392
Option Pricing	p. 396
Estimation of Option Pricing Models	p. 397
Econometric Analysis of Option Prices	p. 401
Options and Revealed Preferences	p. 404
Options on Individual Common Stocks	p. 410
Pricing Fixed-Income Derivatives	p. 412
Pricing with Affine DTSMs	p. 413
Pricing Using Forward-Rate Models	p. 417
Risk Factors and Derivatives Pricing	p. 425
Affine Models of Derivatives Prices	p. 428
Forward-Rate-Based Pricing Models	p. 429
On Model-Basing Hedging	p. 431
Pricing Eurodollar Futures Options	p. 433
References	p. 435
Index	p. 465
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