Modeling Asset Returns: A Comparison of Theoretical and Empirical Models

29 Pages Posted: 6 Feb 2004

See all articles by Erik Lueders

Erik Lueders

Laval University; Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Michael Schröder

ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management

Abstract

This paper presents and compares several time-series models for returns of broad-based stock indices. These models nest a nonlinear asymmetric GARCH (NGARCH) model as a special case. Some of these models are empirically motivated as-hoc specifications others are derived from a representative investor economy with HARA-utility and some are behavioral, i.e. are based on recent findings in behavioral finance. To compare these models we use the inflation adjusted MSCI total return indices of 5 large economies, USA, United Kingdom, Germany, France and Japan. The empirical results show that although the pure NGARCH model performs well, the estimation for two indices could be significantly improved by an extension which follows from the representative investor model with HARA-utility.

Keywords: Asset pricing, HARA-utility function, behavioral finance, NGARCH-in-mean

JEL Classification: G12, G15, C22

Suggested Citation

Lueders, Erik and Schröder, Michael, Modeling Asset Returns: A Comparison of Theoretical and Empirical Models. Available at SSRN: https://ssrn.com/abstract=499329 or http://dx.doi.org/10.2139/ssrn.499329

Erik Lueders

Laval University ( email )

Quebec G1K 7P4
Canada

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi (CIRPÉE)

Ste-Foy, Quebec G1K 7P4
Canada

Michael Schröder (Contact Author)

ZEW – Leibniz Centre for European Economic Research - International Finance and Financial Management ( email )

L 7,1
P.O. Box 10 34 43
D-68034 Mannheim
Germany
+49 621 1235 368 (Phone)
+49 621 1235 223 (Fax)

HOME PAGE: http://www.zew.de/en/team/msc/?cHash=c9507802336d8f7db96848c539ed2f89

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