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Estimation Of Continuous-Time Models For Stock Returns And Interest Rates

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  • GALLANT, A. RONALD
  • TAUCHEN, GEORGE

Abstract

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.

Suggested Citation

  • Gallant, A. Ronald & Tauchen, George, 1997. "Estimation Of Continuous-Time Models For Stock Returns And Interest Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 1(1), pages 135-168, January.
    • Handle: RePEc:cup:macdyn:v:1:y:1997:i:01:p:135-168_00
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    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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