Essays in asset pricing Public Deposited

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  • March 20, 2019
  • Khrapov, Stanislav
    • Affiliation: College of Arts and Sciences, Department of Economics
  • In chapter 1 I consider a discrete-state economy and construct an asset pricing model for the valuation of consumption and dividend cash flows with short and long maturities. I consider three utility functions: expected utility, Epstein-Zin (EZ), and generalized disappointment aversion (GDA). The main result is that the GDA utility function is a permanent transformation of the expected utility function, in that it amplifies risk premia at all investment horizons. Instead EZ utility is approximately transient transformation of expected utility, implying very similar long-term, but different short-term premia. Volatility literature concentrates on investigation of two-factor volatility process, with one factor being very persistent. In chapter 2 I propose a different parametrization of volatility process that includes this persistent component as a stochastic central tendency. The reparametrization is observationally equivalent but has compelling economic interpretation. I estimate the historical and risk-neutral parameters of the model jointly using GMM with the data on realized volatility and VIX volatility index and treating central tendency as completely unobservable. The main result is that on average the volatility premium is indistinguishable from the premium on highly persistent shocks of the central tendency. In chapter 3 I propose the extension of discrete time stochastic volatility model in Darolles et al. (2006) that includes the leverage effect. There are several advantages of this model over commonly used continuous-time diffusions and discrete-time GARCH models. First, equity risk premium and volatility risk premium are known in closed form. Second, the model is robust to temporal aggregation. Third, it has a well-known continuous-time limit. Moreover, thanks to exponential affine form it is easy to compute option prices in closed form through Fourier transform.
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  • In Copyright
  • "... in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Department of Economics."
  • Renault, Eric
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  • Chapel Hill, NC
  • Open access

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