ESTIMATION OF CONTINUOUS-TIME MODELS FOR STOCK RETURNS AND INTEREST RATES

A. Gallant and George Tauchen ()

Macroeconomic Dynamics, 1997, vol. 1, issue 1, 135-168

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.

Date: 1997
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Working Paper: Estimation of Continuous Time Models for Stock Returns and Interest Rates (1995)
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