Preface xi
Acknowledgments xiii
1 Introduction 1
1.1. Model Implied Restrictions 3
1.2. Econometric Estimation Strategies 10
I Econometric Methods for Analyzing DAPMs 15
2 Model Specification and Estimation Strategies 17
2.1. Full Information about Distributions 17
2.2. No Information about the Distribution 21
2.3. Limited Information: GMM Estimators 25
2.4. Summary of Estimators 34
3 Large-Sample Properties of Extremum Estimators 35
3.1. Basic Probability Model 35
3.2. Consistency: General Considerations 39
3.3. Consistency of Extremum Estimators 44
3.4. Asymptotic Normality of Extremum Estimators 48
3.5. Distributions of Specific Estimators 53
3.6. Relative Efficiency of Estimators 60
4 Goodness-of-Fit and Hypothesis Testing 71
4.1. GMM Tests of Goodness-of-Fit 71
4.2. Testing Restrictions on θ0 77
4.3. Comparing LR, Wald, and LM Tests 84
4.4. Inference for Sequential Estimators 86
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4.5. Inference with Unequal-Length Samples 88
4.6. Underidentified Parameters under H0 94
5 Affine Processes 98
5.1. Affine Processes: Overview 100
5.2. Continuous-Time Affine Processes 101
5.3. Discrete-Time Affine Processes 108
5.4. Transforms for Affine Processes 114
5.5. GMM Estimation of Affine Processes 117
5.6. ML Estimation of Affine Processes 118
5.7. Characteristic Function-Based Estimators 124
6 Simulation-Based Estimators of DAPMs 130
6.1. Introduction 130
6.2. SME: The Estimation Problem 132
6.3. Consistency of the SME 135
6.4. Asymptotic Normality of the SME 142
6.5. Extensions of the SME 144
6.6. Moment Selection with SME 146
6.7. Applications of SME to Diffusion Models 152
6.8. Markov Chain Monte Carlo Estimation 153
7 Stochastic Volatility, Jumps, and Asset Returns 158
7.1. Preliminary Observations about Shape 159
7.2. Discrete-Time Models 164
7.3. Estimation of Discrete-Time Models 171
7.4. Continuous-Time Models 174
7.5. Estimation of Continuous-Time Models 179
7.6. Volatility Scaling 185
7.7. Term Structures of Conditional Skewness
and Kurtosis 187
II Pricing Kernels, Preferences, and DAPMs 193
8 Pricing Kernels and DAPMs 195
8.1. Pricing Kernels 195
8.2. Marginal Rates of Substitution as q∗ 198
8.3. No-Arbitrage and Risk-Neutral Pricing 202
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9 Linear Asset Pricing Models 211
9.1. Economic Motivations for Examining Asset
Return Predictability 211
9.2. Market Microstructure Effects 214
9.3. A Digression on Unit Roots in Time Series 219
9.4. Tests for Serial Correlation in Returns 224
9.5. Evidence on Stock-Return Predictability 231
9.6. Time-Varying Expected Returns on Bonds 237
10 Consumption-Based DAPMs 246
10.1. Empirical Challenges Facing DAPMs 247
10.2. Assessing Goodness-of-Fit 251
10.3. Time-Separable Single-Good Models 254
10.4. Models with Durable Goods 260
10.5. Habit Formation 265
10.6. Non-State-Separable Preferences 274
10.7. Other Preference-Based Models 276
10.8. Bounds on the Volatility of mn
t 277
11 Pricing Kernels and Factor Models 282
11.1. A Single-Beta Representation of Returns 283
11.2. Beta Representations of Excess Returns 285
11.3. Conditioning Down and Beta Relations 287
11.4. From Pricing Kernels to Factor Models 290
11.5. Methods for Testing Beta Models 297
11.6. Empirical Analyses of Factor Models 302
III No-Arbitrage DAPMs 309
12 Models of the Term Structure of Bond Yields 311
12.1. Key Ingredients of a DTSM 312
12.2. Affine Term Structure Models 316
12.3. Continuous-Time Affine DTSMs 317
12.4. Discrete-Time Affine DSTMs 327
12.5. Quadratic-Gaussian Models 329
12.6. Nonaffine Stochastic Volatility Models 331
12.7. Bond Pricing with Jumps 332
12.8. DTSMs with Regime Shifts 334
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13 Empirical Analyses of Dynamic Term Structure Models 338
13.1. Estimation of DTSMs 338
13.2. Empirical Challenges for DTSMs 344
13.3. DTSMs of Swap and Treasury Yields 348
13.4. Factor Interpretations in Affine DTSMs 356
13.5. Macroeconomic Factors and DTSMs 359
14 Term Structures of Corporate Bond Spreads 364
14.1. DTSMs of Defaultable Bonds 364
14.2. Parametric Reduced-Form Models 369
14.3. Parametric Structural Models 371
14.4. Empirical Studies of Corporate Bonds 373
14.5. Modeling Interest Rate Swap Spreads 383
14.6. Pricing Credit Default Swaps 384
14.7. Is Default Risk Priced? 387
15 Equity Option Pricing Models 391
15.1. No-Arbitrage Option Pricing Models 392
15.2. Option Pricing 396
15.3. Estimation of Option Pricing Models 397
15.4. Econometric Analysis of Option Prices 401
15.5. Options and Revealed Preferences 404
15.6. Options on Individual Common Stocks 410
16 Pricing Fixed-Income Derivatives 412
16.1. Pricing with Affine DTSMs 413
16.2. Pricing Using Forward-Rate Models 417
16.3. Risk Factors and Derivatives Pricing 425
16.4. Affine Models of Derivatives Prices 428
16.5. Forward-Rate-Based Pricing Models 429
16.6. On Model-Basing Hedging 431
16.7. Pricing Eurodollar Futures Options 433
References 435
Index 465