Asset Returns Given Stochastic Volatility of the Information Process

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


Although the previous analysis has shown that even with one risk factor only, many return characteristics can be generated in an efficient market, a one-factor framework may be too simple to characterise asset returns Moreover, it seems fruitful to see the effect a second risk factor driving the information process might have on return characteristics. 1 In Chap 3 we have seen that it is quite sensible to assume that the volatility of the information process is stochastic.


Information Process Asset Price Stochastic Differential Equation Stochastic Volatility Asset Return 
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  1. 1.
    This chapter is based on Lüders and Peisl [132].Google Scholar
  2. 2.
    See for example Karatzas and Shreve [108].Google Scholar
  3. 3.
    See also the discussion in Sect 2.2.Google Scholar
  4. 4.
    See for example Schöbel and Zhu [171] and Heston and Nandi [95].Google Scholar
  5. 5.
    The described effect is known as the volatility feedback effect, see also p 26 of this monograph For similar results in discrete time see Campbell and Hentschel [32] and Wu [188] See Corollary 1 for an alternative explanation of asymmetric volatility.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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