Literature Review

  • Erik Lüders
Part of the ZEW Economic Studies book series (ZEW, volume 24)


In the previous chapters we have introduced the pricing kernel and the information process as two elementary processes for the characterization of asset prices We will now review the empirical and theoretical literature on asset pricing The implications for the information process and the pricing kernel will be emphasised The aim of this chapter is to summarise the main empirical and theoretical results in order to point out still open questions in asset pricing and, thus, to clarify the contribution of new theoretical results on the pricing of risky assets which are presented in the following chapters Since the analysis in the following chapters will be theoretical, in the literature review theoretical contributions are emphasised.


Cash Flow Risk Aversion Asset Price Option Price Implied Volatility 
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  1. 1.
    For a review of this topic and a recent study for Germany, see Meyer [143].Google Scholar
  2. 2.
    For earlier studies see, Merton [141], Poterba and Summers [157], French, Schwert and Stambaugh [77].Google Scholar
  3. 3.
    See, Bollerslev, Engle and Nelson [19].Google Scholar
  4. 4.
    For an overview, see also Ghysels, Harvey and Renault [82].Google Scholar
  5. 5.
    See for example Ding, Granger and Engle [55].Google Scholar
  6. 6.
    See Andersen, Bollerslev, Diebold and Ebens [4], Hentschel [93], Mayhew and Stivers [135] and Tauchen, Zhang and Liu [182].Google Scholar
  7. 7.
    LeRoy and Porter [119] and Shleifer [175] started the literature For overviews see Cochrane [40] and Cochrane [41].Google Scholar
  8. 8.
    Positive serial correlation in index returns has been confirmed for many countries, see for example Poon and Taylor [158] for the FTSE for the time-period 1965–1989 but also Baily, Stulz and Yen [7] for Asian markets from 1977–1985.Google Scholar
  9. 9.
    See for example Froot and Perold [79]Google Scholar
  10. 10.
    See also p 32 of this monograph.Google Scholar
  11. 11.
    For an overview of earlier studies see for example Fama [63].Google Scholar
  12. 12.
    Profitability of momentum strategies is also documented for many different countries (see Rouwenhorst [163] and Rouwenhorst [164] for European and emerging markets) as well as on the basis of international stock market indices instead of individual stocks, see Chan, Hameed and Tong [36].Google Scholar
  13. 13.
    For a detailed literature review and a thorough analysis of the German market, see Külpmann [116].Google Scholar
  14. 14.
    See also Campbell [31] and Daniel [48] for the power of predictability tests and Cochrane [41] for a discussion of the predictive power of dividend yields.Google Scholar
  15. 15.
    See also Stambaugh [178].Google Scholar
  16. 16.
    See also Fornari and Mele [69] for a related approach However, they analyze futures written on Italian government bonds.Google Scholar
  17. 17.
    Jackwerth [103] addresses several reasons including the question of the appropriate bandwidth in the kernel estimation as well as the different calculation of the expected return distribution See also the discussion in Rosenberg and Engle [160].Google Scholar
  18. 18.
    See the discussion on implied pricing kernels in Chap 2 and in Sect 4.2 See also Ait-Sahalia, Wang and Yared [2] who estimate the risk-neutral density from asset returns They apply empirically the Girsanov Theorem.Google Scholar
  19. 19.
    Many other articles contributed to the understanding of this relationship See for example also Rubinstein [166] or Breeden and Litzenberger [25].Google Scholar
  20. 20.
    More precisely, Bick assumes that this process is governed by a geometric Brownian motion Hence, he uses a process as given by (3.3).Google Scholar
  21. 21.
    The index (B) is used for the approach of Bick-He/Leland.Google Scholar
  22. 22.
    However, as already stated these characterizations are equivalent to the “deterministic function” argument In Appendix A.2 we restate the Lemma 2 of Decamps and Lazrak [51] which shows the equivalence of theses conditions.Google Scholar
  23. 23.
    For a derivation see He and Leland [91], pp 598 For a derivation of the 2-dimensional case see also the following paragraph “Viability in two-factor models”.Google Scholar
  24. 24.
    Hodges and Carverhill [97] and Hodges and Selby [96] analyze special cases of (4.2) and relate the viability conditions to a non-linear partial differential equation known as Burgers’ equation The advantage of Burgers’ equation is that this partial differential equation is well understood.Google Scholar
  25. 25.
    See also Sect 2.2.Google Scholar
  26. 26.
    The index (PT) on the variables means that these are variables in the model of Pham and Touzi.Google Scholar
  27. 27.
    This problem has also been addressed in empirical studies where the pricing kernel projected onto an investment index is analyzed, see Brown and Jackwerth [26] and Rosenberg and Engle [160].Google Scholar
  28. 28.
    See for example Pranke and Hax [72], pp 377-380 or Ingersoll [101], pp 104-107.Google Scholar
  29. 29.
    See Proposition 2 in Franke [71] For a related result see Fama [62].Google Scholar
  30. 30.
    For a discussion of preference assumptions see also Rubinstein [167] or Camara [28].Google Scholar
  31. 31.
    A seminal article in discrete time is Samuelson [170] Samuelson shows that under the assumption of risk neutrality forward asset prices follow a martingale It was already recognised soon after the article of Samuelson that the assumption of risk neutrality was essential for this result (see, LeRoy [118] and Ohlson [149]).Google Scholar
  32. 32.
    For earlier work on learning in an asset pricing context, see for example Detemple [54] and Timmerman [183].Google Scholar
  33. 33.
    For an overview on market microstructure theory see O’Hara [148] Consider also the work of Föllmer and Schweizer [68], Frey [78], Kohlmann and Zhou [112] and He and Wang [92], Wang [186] See Bomfim [20] for a general equilibrium model with heterogeneous expectations.Google Scholar
  34. 34.
    For related articles, see Guo [88] and Guo [89].Google Scholar
  35. 35.
    See also Gul [87].Google Scholar
  36. 36.
    For discussions see for example Brennan [23] and Shleifer [177].Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  • Erik Lüders
    • 1
  1. 1.Dépt. de Finance et Assurance Pavillon Palais-PrinceUniversité LavalQuébec (Quebec)Canada

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