Empirical Dynamic Asset Pricing
Model Specification and Econometric Assessment
1st Edition
Published on 16. November 2022
496 pages
978-1-4008-2923-1 (ISBN)
Description
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.
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.
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03/2006
Princeton University Press
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Person
Kenneth J. Singleton is Adams Distinguished Professor of Management and Senior Associate Dean for Academic Affairs at the Graduate School of Business, Stanford University. A Fellow of the Econometric Society, he is the recipient of the organization's Frisch Prize. He is also the recipient of the Smith-Breeden Distinguished Paper Award from the Journal of Finance. Singleton is a director of the American Finance Association and was previously an editor of the Review of Financial Studies. He is coauthor, with Darrell Duffie, of Credit Risk: Pricing, Management, and Measurement (Princeton).
Content
Preface xi
Acknowledgments xiii
Chapter 1: Introduction 1
1.1. Model Implied Restrictions 3
1.2. Econometric Estimation Strategies 10
Part I: Econometric Methods for Analyzing DAPMs 15
Chapter 2: Model Specification and Estimation Strategies 17
2.1. Full Information about Distributions 17
2.2. No Information about the Distribution 21
2.3. Limited Information: GMM Estimators 25
2.4. Summary of Estimators 34
Chapter 3: Large-Sample Properties of Extremum Estimators 35
3.1. Basic Probability Model 35
3.2. Consistency: General Considerations 39
3.3. Consistency of Extremum Estimators 44
3.4. Asymptotic Normality of Extremum Estimators 48
3.5. Distributions of Specific Estimators 53
3.6. Relative Efficiency of Estimators 60
Chapter 4: Goodness-of-Fit and Hypothesis Testing 71
4.1. GMM Tests of Goodness-of-Fit 71
4.2. Testing Restrictions on ? 0 77
4.3. Comparing LR, Wald, and LM Tests 84
4.4. Inference for Sequential Estimators 86
4.5. Inference with Unequal-Length Samples 88
4.6. Underidentified Parameters under H 0 94
Chapter 5: Affine Processes 98
5.1. Affine Processes: Overview 100
5.2. Continuous-Time Affine Processes 101
5.3. Discrete-Time Affine Processes 108
5.4. Transforms for Affine Processes 114
5.5. GMM Estimation of Affine Processes 117
5.6. ML Estimation of Affine Processes 118
5.7. Characteristic Function-Based Estimators 124
Chapter 6: Simulation-Based Estimators of DAPMs 130
6.1. Introduction 130
6.2. SME: The Estimation Problem 132
6.3. Consistency of the SME 135
6.4. Asymptotic Normality of the SME 142
6.5. Extensions of the SME 144
6.6. Moment Selection with SME 146
6.7. Applications of SME to Diffusion Models 152
6.8. Markov Chain Monte Carlo Estimation 153
Chapter 7: Stochastic Volatility, Jumps, and Asset Returns 158
7.1. Preliminary Observations about Shape 159
7.2. Discrete-Time Models 164
7.3. Estimation of Discrete-Time Models 171
7.4. Continuous-Time Models 174
7.5. Estimation of Continuous-Time Models 179
7.6. Volatility Scaling 185
7.7. Term Structures of Conditional Skewness and Kurtosis 187
Part II: Pricing Kernels, Preferences, and DAPMs 193
Chapter 8: Pricing Kernels and DAPMs 195
8.1. Pricing Kernels 195
8.2. Marginal Rates of Substitution as q *198
8.3. No-Arbitrage and Risk-Neutral Pricing 202
Chapter 9: Linear Asset Pricing Models 211
9.1. Economic Motivations for Examining Asset Return Predictability 211
9.2. Market Microstructure Effects 214
9.3. A Digression on Unit Roots in Time Series 219
9.4. Tests for Serial Correlation in Returns 224
9.5. Evidence on Stock-Return Predictability 231
9.6. Time-Varying Expected Returns on Bonds 237
Chapter 10: Consumption-Based DAPMs 246
10.1. Empirical Challenges Facing DAPMs 247
10.2. Assessing Goodness-of-Fit 251
10.3. Time-Separable Single-Good Models 254
10.4. Models with Durable Goods 260
10.5. Habit Formation 265
10.6. Non-State-Separable Preferences 274
10.7. Other Preference-Based Models 276
10.8. Bounds on the Volatility of m nt 277
Chapter 11: Pricing Kernels and Factor Models 282
11.1. A Single-Beta Representation of Returns 283
11.2. Beta Representations of Excess Returns 285
11.3. Conditioning Down and Beta Relations 287
11.4. From Pricing Kernels to Factor Models 290
11.5. Methods for Testing Beta Models 297
11.6. Empirical Analyses of Factor Models 302
Part III: No-Arbitrage DAPMs 309
Chapter 12: Models of the Term Structure of Bond Yields 311
12.1. Key Ingredients of a DTSM 312
12.2. Affine Term Structure Models 316
12.3. Continuous-Time Affine DTSMs 317
12.4. Discrete-Time Affine DSTMs 327
12.5. Quadratic-Gaussian Models 329
12.6. NonAffine Stochastic Volatility Models 331
12.7. Bond Pricing with Jumps 332
12.8. DTSMs with Regime Shifts 334
Chapter 13: Empirical Analyses of Dynamic Term Structure Models 338
13.1. Estimation of DTSMs 338
13.2. Empirical Challenges for DTSMs 344
13.3. DTSMs of Swap and Treasury Yields 348
13.4. Factor Interpretations in Affine DTSMs 356
13.5. Macroeconomic Factors and DTSMs 359
Chapter 14: Term Structures of Corporate Bond Spreads 364
14.1. DTSMs of Defaultable Bonds 364
14.2. Parametric Reduced-Form Models 369
14.3. Parametric Structural Models 371
14.4. Empirical Studies of Corporate Bonds 373
14.5. Modeling Interest Rate Swap Spreads 383
14.6. Pricing Credit Default Swaps 384
14.7. Is Default Risk Priced? 387
Chapter 15: Equity Option Pricing Models 391
15.1. No-Arbitrage Option Pricing Models 392
15.2. Option Pricing 396
15.3. Estimation of Option Pricing Models 397
15.4. Econometric Analysis of Option Prices 401
15.5. Options and Revealed Preferences 404
15.6. Options on Individual Common Stocks 410
Chapter 16: Pricing Fixed-Income Derivatives 412
16.1. Pricing with Affine DTSMs 413
16.2. Pricing Using Forward-Rate Models 417
16.3. Risk Factors and Derivatives Pricing 425
16.4. Affine Models of Derivatives Prices 428
16.5. Forward-Rate-Based Pricing Models 429
16.6. On Model-Basing Hedging 431
16.7. Pricing Eurodollar Futures Options 433
References 435
Index 465
Chapter 1: Introduction 1
1.1. Model Implied Restrictions 3
1.2. Econometric Estimation Strategies 10
Part I: Econometric Methods for Analyzing DAPMs 15
Chapter 2: Model Specification and Estimation Strategies 17
2.1. Full Information about Distributions 17
2.2. No Information about the Distribution 21
2.3. Limited Information: GMM Estimators 25
2.4. Summary of Estimators 34
Chapter 3: Large-Sample Properties of Extremum Estimators 35
3.1. Basic Probability Model 35
3.2. Consistency: General Considerations 39
3.3. Consistency of Extremum Estimators 44
3.4. Asymptotic Normality of Extremum Estimators 48
3.5. Distributions of Specific Estimators 53
3.6. Relative Efficiency of Estimators 60
Chapter 4: Goodness-of-Fit and Hypothesis Testing 71
4.1. GMM Tests of Goodness-of-Fit 71
4.2. Testing Restrictions on ? 0 77
4.3. Comparing LR, Wald, and LM Tests 84
4.4. Inference for Sequential Estimators 86
4.5. Inference with Unequal-Length Samples 88
4.6. Underidentified Parameters under H 0 94
Chapter 5: Affine Processes 98
5.1. Affine Processes: Overview 100
5.2. Continuous-Time Affine Processes 101
5.3. Discrete-Time Affine Processes 108
5.4. Transforms for Affine Processes 114
5.5. GMM Estimation of Affine Processes 117
5.6. ML Estimation of Affine Processes 118
5.7. Characteristic Function-Based Estimators 124
Chapter 6: Simulation-Based Estimators of DAPMs 130
6.1. Introduction 130
6.2. SME: The Estimation Problem 132
6.3. Consistency of the SME 135
6.4. Asymptotic Normality of the SME 142
6.5. Extensions of the SME 144
6.6. Moment Selection with SME 146
6.7. Applications of SME to Diffusion Models 152
6.8. Markov Chain Monte Carlo Estimation 153
Chapter 7: Stochastic Volatility, Jumps, and Asset Returns 158
7.1. Preliminary Observations about Shape 159
7.2. Discrete-Time Models 164
7.3. Estimation of Discrete-Time Models 171
7.4. Continuous-Time Models 174
7.5. Estimation of Continuous-Time Models 179
7.6. Volatility Scaling 185
7.7. Term Structures of Conditional Skewness and Kurtosis 187
Part II: Pricing Kernels, Preferences, and DAPMs 193
Chapter 8: Pricing Kernels and DAPMs 195
8.1. Pricing Kernels 195
8.2. Marginal Rates of Substitution as q *198
8.3. No-Arbitrage and Risk-Neutral Pricing 202
Chapter 9: Linear Asset Pricing Models 211
9.1. Economic Motivations for Examining Asset Return Predictability 211
9.2. Market Microstructure Effects 214
9.3. A Digression on Unit Roots in Time Series 219
9.4. Tests for Serial Correlation in Returns 224
9.5. Evidence on Stock-Return Predictability 231
9.6. Time-Varying Expected Returns on Bonds 237
Chapter 10: Consumption-Based DAPMs 246
10.1. Empirical Challenges Facing DAPMs 247
10.2. Assessing Goodness-of-Fit 251
10.3. Time-Separable Single-Good Models 254
10.4. Models with Durable Goods 260
10.5. Habit Formation 265
10.6. Non-State-Separable Preferences 274
10.7. Other Preference-Based Models 276
10.8. Bounds on the Volatility of m nt 277
Chapter 11: Pricing Kernels and Factor Models 282
11.1. A Single-Beta Representation of Returns 283
11.2. Beta Representations of Excess Returns 285
11.3. Conditioning Down and Beta Relations 287
11.4. From Pricing Kernels to Factor Models 290
11.5. Methods for Testing Beta Models 297
11.6. Empirical Analyses of Factor Models 302
Part III: No-Arbitrage DAPMs 309
Chapter 12: Models of the Term Structure of Bond Yields 311
12.1. Key Ingredients of a DTSM 312
12.2. Affine Term Structure Models 316
12.3. Continuous-Time Affine DTSMs 317
12.4. Discrete-Time Affine DSTMs 327
12.5. Quadratic-Gaussian Models 329
12.6. NonAffine Stochastic Volatility Models 331
12.7. Bond Pricing with Jumps 332
12.8. DTSMs with Regime Shifts 334
Chapter 13: Empirical Analyses of Dynamic Term Structure Models 338
13.1. Estimation of DTSMs 338
13.2. Empirical Challenges for DTSMs 344
13.3. DTSMs of Swap and Treasury Yields 348
13.4. Factor Interpretations in Affine DTSMs 356
13.5. Macroeconomic Factors and DTSMs 359
Chapter 14: Term Structures of Corporate Bond Spreads 364
14.1. DTSMs of Defaultable Bonds 364
14.2. Parametric Reduced-Form Models 369
14.3. Parametric Structural Models 371
14.4. Empirical Studies of Corporate Bonds 373
14.5. Modeling Interest Rate Swap Spreads 383
14.6. Pricing Credit Default Swaps 384
14.7. Is Default Risk Priced? 387
Chapter 15: Equity Option Pricing Models 391
15.1. No-Arbitrage Option Pricing Models 392
15.2. Option Pricing 396
15.3. Estimation of Option Pricing Models 397
15.4. Econometric Analysis of Option Prices 401
15.5. Options and Revealed Preferences 404
15.6. Options on Individual Common Stocks 410
Chapter 16: Pricing Fixed-Income Derivatives 412
16.1. Pricing with Affine DTSMs 413
16.2. Pricing Using Forward-Rate Models 417
16.3. Risk Factors and Derivatives Pricing 425
16.4. Affine Models of Derivatives Prices 428
16.5. Forward-Rate-Based Pricing Models 429
16.6. On Model-Basing Hedging 431
16.7. Pricing Eurodollar Futures Options 433
References 435
Index 465
