Estimation of Continuous Time Models for Stock Returns and Interest Rates
43 Pages Posted: 12 May 1997
Date Written: January 1997
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: Suggested Citation