Estimation of Continuous Time Models for Stock Returns and Interest Rates

43 Pages Posted: 12 May 1997

See all articles by A. Ronald Gallant

A. Ronald Gallant

Duke University - Fuqua School of Business, Economics Group; New York University - Department of Economics

George Tauchen

Duke University - Economics Group

Date Written: January 1997

Abstract

Efficient Method of Moments (EMM) is used to estimate and test continuous time diffusion models for stock returns and interest rates. For stock returns, a four-state, two-factor diffusion with one state observed can account for the dynamics of the daily return on the S&P composite index, 1927-1987. This contrasts with results indicating that discrete-time, stochastic volatility models cannot explain these dynamics. For interest rates, a trivariate yield factor model is estimated from weekly, 1962-1995, Treasury rates. The yield factor model is sharply rejected, although extensions permitting convexities in the local variance come closer to fitting the data.

JEL Classification: C51, E43, G12

Suggested Citation

Gallant, A. Ronald and Tauchen, George E., Estimation of Continuous Time Models for Stock Returns and Interest Rates (January 1997). Available at SSRN: https://ssrn.com/abstract=41018 or http://dx.doi.org/10.2139/ssrn.41018

A. Ronald Gallant

Duke University - Fuqua School of Business, Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States

New York University - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

George E. Tauchen (Contact Author)

Duke University - Economics Group ( email )

Box 90097
221 Social Sciences
Durham, NC 27708-0097
United States
919-660-1812 (Phone)
919-684-8974 (Fax)

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