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ESTIMATION OF CONTINUOUS-TIME MODELS FOR STOCKRETURNS AND INTEREST RATES

Published online by Cambridge University Press:  02 March 2005

A. RONALD GALLANT
Affiliation:
University of North Carolina
GEORGE TAUCHEN
Affiliation:
Duke University

Extract

Efficient Method of Moments 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.

Type
Research Article
Copyright
© 1997 Cambridge University Press

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