Empirical Asset Pricing with Nonlinear Risk Premia

Aleksandar Mijatović and Paul Schneider ()

Journal of Financial Econometrics, 2014, vol. 12, issue 3, 479-506

Abstract: We introduce a new model for the joint dynamics of the S&P 100 index and the VXO implied volatility index. The nonlinear specification of the variance process is designed to simultaneously accommodate extreme persistence and strong mean reversion. This grants superior forecasting power over the standard (linear) specifications for implied variance forecasting. We obtain statistically significant predictions in an out-of-sample exercise spanning several market crashes starting 1986 and including the recent subprime crisis. The model specification is possible through a simple continuous-time no-arbitrage asset pricing framework that combines semi-analytic pricing with a nonlinear specification for the market price of risk.

Date: 2014
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/10.1093/jjfinec/nbt018 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Empirical asset pricing with nonlinear risk premia (2009)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:jfinec:v:12:y:2014:i:3:p:479-506.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani

More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().