A Markov Model of Heteroskedasticity, Risk, and Learning in the Stock Market

Christopher M. Turner, Richard Startz and Charles Nelson

No 2818, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Risk premia in the stock market are assumed to move with time varying risk. We present a model in which the variance of time excess return of a portfolio depends on a state variable generated by a first-order Markov process. A model in which the realization of the state is known to economic agents, but unknown to the econometrician. is estimated. The parameter estimates are found to imply that time risk premium declines as time variance of returns rises. We then extend the model to allow agents to be uncertain about time state. Agents make their decisions in period t using a prior distribution of time state based only on past realizations of the excess return through period t-1 plus knowledge of the structure of the model. These parameter estimates from this model are consistent with asset pricing theory.

Date: 1989-01
Note: ME
References: View complete reference list from CitEc
Citations: View citations in EconPapers (267)

Published as Journal of Financial Economics, April 1990.

Downloads: (external link)
http://www.nber.org/papers/w2818.pdf (application/pdf)

Related works:
Journal Article: A Markov model of heteroskedasticity, risk, and learning in the stock market (1989)
Working Paper: THE MARKOV MODEL OF HETEROSKEDASTICITY, RISK AND LEARNING IN THE STOCK MARKET (1989)
Working Paper: THE MARKOV MODEL OF HETEROSKEDASTICITY, RISK AND LEARNING IN THE STOCK MARKET (1989)
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:nbr:nberwo:2818

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w2818

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().