Econometrics

Download Financial Pricing Models in Continuous Time and Kalman by B.Philipp Kellerhals PDF

By B.Philipp Kellerhals

The fashionable box of economic economics asks for sound pricing versions grounded at the conception of monetary determination making in addition to for exact estimation thoughts by way of empirical inferences of the desired version. the amount Financial Pricing versions in non-stop Time and Kalman Filtering presents a framework that exhibits the right way to bridge the distance among the time-continuous pricing perform in monetary engineering and the capital marketplace facts necessarily in simple terms on hand at discrete time durations. beginning with the overall framework we give some thought to functions to monetary tools traded at the markets for money, mounted source of revenue items, and electrical energy derivatives.

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38 A stochastic process corresponding to an exponential growth of the state variable which is a widespread asset pricing assumption for modeling equities in financial economics. 2 Economic Foundation 49 How this dynamically modeled premium is related to the empirical premium will be clarified further on. 39 Such a premium is intended to capture the stochastic price behavior of the closed-end fund market prices that is superimposed on the dynamics of the underlying asset values. The stochastic specification of this second factor is motivated by the observed meanreverting dynamic fluctuations of the empirical premia.

1: ROC Taiwan FUnd (ROC) Considering the closed-end funds in our sample35 we can identify three different patterns of empirical premia behavior over time: (i) Premia which change from positive to negative values over the examined period of time, (ii) mainly positive premia over time, and (iii) negative premia or discounts for the major part of the sample. Out of our examined sample we choose three representative funds for each case: The ROC Taiwan FUnd (ROC), the Indonesia Fund (IF), and the GT Global Eastern Europe (GTF).

Instead, traded on organized exchanges the market prices of the closed-end funds seem to reflect more the supply and demand for these shares than the value of their underlying assets. The latter would be expected in a rational and efficient market. This brings us to the second line of closed-end fund literature which concentrates on behavioral explanations of the observable discounts. 30 The proposition is that fluctuations in premia are driven by changes in individual investor sentiment. By finding that closed-end fund premia are a measure of the sentiment of individual investors they conclude that a changing sentiment makes the funds riskier than their underlying portfolios and such causes the average underpricing of closed-end funds relative to their fundamentals.

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