Asset Returns with Non-Constant Elasticity of the Pricing Kernel
The purpose of this chapter1 is to derive the implications of non-constant elasticity of the pricing kernel on asset returns We wish to keep the analysis as general as possible and therefore we avoid a parameterization of the pricing kernel The results are thus purely qualitative, a quantification of the implications is presented in the following chapter.
KeywordsConstant Elasticity Asset Price Risk Premium Asset Return Geometric Brownian Motion
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- 1.This Chapter is based on Lüders .Google Scholar
- 2.This follows from the Theorem of Feynman Kac.Google Scholar
- 5.See also the discussion on p 26.Google Scholar
- 6.See p 26 of this monograph.Google Scholar
- 7.See for example Andersen, Bollerslev, Diebold and Ebens , Hentschel , Mayhew and Stivers , and Tauchen, Zhang and Liu .Google Scholar
- 8.For an overview on the estimation of diffusion models see Gourieroux and Jasiak  A recent development on the estimation of diffusion processes is found in Elerian, Chib and Shephard .Google Scholar
- 9.For an overview of the empirical evidence of the predictive power of financial ratios see also Chap 4.Google Scholar
- 10.Note that we define periods such that their length is 1 This simplifies the notation. We assume that T ≫ 1.Google Scholar
- 11.For a more detailed discussion see for example Ohlson  and Hess and Lüders .Google Scholar