Equilibrium Valuation of Options on the Market Portfolio with Stochastic Volatility and Return Predictability

Melanie Cao ()

No 961, Working Papers from Queen's University, Department of Economics

Abstract: This paper uses an extension of the equilibrium model of Lucas (1978) to study the valuation of options on the market portfolio with return predictability, endogenous stochastic volatility and interest rates. Equilibrium conditions imply that the mean-reverting of the rate of dividend growth induces the predictable feature of the market portfolio.

Keywords: INTEREST RATE; PRICES; MODELS (search for similar items in EconPapers)
JEL-codes: G11 G13 E43 (search for similar items in EconPapers)
Date: 1997

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Persistent link: http://EconPapers.repec.org/RePEc:qed:wpaper:961

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