Essays in Financial Econometrics

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Title: Essays in Financial Econometrics
Author: Jeong, Dae Hee
Abstract: I consider continuous time asset pricing models with stochastic differential utility incorporating decision makers' concern with ambiguity on true probability measure . In order to identify and estimate key parameters in the models , I use a novel econometric methodology developed recently by Park (2008 ) for the statistical inference on continuous time conditional mean models . The methodology only imposes the condition that the pricing error is a continuous martingale to achieve identification , and obtain consistent and asymptotically normal estimates of the unknown parameters . Under a representative agent setting , I empirically evaluate alternative preference specifications including a multiple -prior recursive utility . My empirical findings are summarized as follows : Relative risk aversion is estimated around 1 .5 -5 .5 with ambiguity aversion and 6 -14 without ambiguity aversion . Related , the estimated ambiguity aversion is both economically and statistically significant and including the ambiguity aversion clearly lowers relative risk aversion . The elasticity of intertemporal substitution (EIS ) is higher than 1 , around 1 .3 -22 with ambiguity aversion , and quite high without ambiguity aversion . The identification of EIS appears to be fairly weak , as observed by many previous authors , though other aspects of my empirical results seem quite robust . Next , I develop an approach to test for martingale in a continuous time framework . The approach yields various test statistics that are consistent against a wide class of nonmartingale semimartingales . A novel aspect of my approach is to use a time change defined by the inverse of the quadratic variation of a semimartingale , which is to be tested for the martingale hypothesis . With the time change , a continuous semimartingale reduces to Brownian motion if and only if it is a continuous martingale . This follows immediately from the celebrated theorem by Dambis , Dubins and Schwarz . For the test of martingale , I may therefore see if the given process becomes Brownian motion after the time change . I use several existing tests for multivariate normality to test whether the time changed process is indeed Brownian motion . I provide asymptotic theories for my test statistics , on the assumption that the sampling interval decreases , as well as the time horizon expands . The stationarity of the underlying process is not assumed , so that my results are applicable also to nonstationary processes . A Monte -Carlo study shows that our tests perform very well for a wide range of realistic alternatives and have superior power than other discrete time tests .
URI: http : / /hdl .handle .net /1969 .1 /ETD -TAMU -2009 -08 -7167
Date: 2010-01-14

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Essays in Financial Econometrics. Available electronically from http : / /hdl .handle .net /1969 .1 /ETD -TAMU -2009 -08 -7167 .

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