Thornton, Michael Alan orcid.org/0000-0002-4470-809X and Chambers, Marcus (2016) The Exact Discretisation of CARMA Models with Applications in Finance. Journal of empirical finance. 739 - 761. ISSN 0927-5398
Abstract
The problem of estimating a continuous time model using discretely observed data is common in empirical finance. This paper uses recently developed methods of deriving the exact discrete representation for a continuous time ARMA (autoregressive moving average) system of order p, q to consider three popular models in finance. Our results for two benchmark term structure models show that higher order ARMA processes provide a significantly better fit than standard Ornstein-Uhlenbeck processes. We then explore present value models linking stock prices and dividends in the presence of cointegration. Our methods enable us to take account of the fact that the two variables are observed in fundamentally different ways by explicitly modelling the data as mixed stock-flow type, which we then compare with the (more common, but incorrect) treatment of dividends as a stock variable.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2016 Elsevier B.V. This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details. Embargo period: 18 months |
Keywords: | Continuous time ARMA process; discrete time representation; present value; term structure. |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (York) > Economics and Related Studies (York) |
Depositing User: | Pure (York) |
Date Deposited: | 20 Apr 2016 09:14 |
Last Modified: | 21 Jan 2025 17:20 |
Published Version: | https://doi.org/10.1016/j.jempfin.2016.03.006 |
Status: | Published |
Refereed: | Yes |
Identification Number: | 10.1016/j.jempfin.2016.03.006 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:98879 |