Abstract
Motivated by behavioral finance, we introduce multiple embedded financial time clocks. Consistent with asset pricing theory in analyzing equity returns, the investors’ view is considered by introducing a behavioral subordinator. Subordinating to the Brownian motion process in the log-normal model results in a new log-price process whose parameter is as important as the mean and variance. We describe new distributions, demonstrating their use to model tail behavior. The models are applied to S&P 500 returns, treating the Chicago Board Options Exchange (CBOE) volatility index (VIX) as intrinsic-time change and CBOE Volatility-of-Volatility Index as the volatility subordinator. We find these volatility indexes fail as time-change subordinators. We employ a double subordinator model to explain the equity premium puzzle and the excess volatility puzzle. The results indicate the puzzles can be explained by fitting a double subordinator model to the historical data.
Original language | English |
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Pages (from-to) | 290-319 |
Number of pages | 30 |
Journal | Econometric Reviews |
Volume | 40 |
Issue number | 3 |
DOIs | |
State | Published - 2021 |
Keywords
- Behavioral finance
- dynamic asset pricing models
- Lévy-stable distribution
- normal-compound inverse Gaussian distribution
- variance-gamma-gamma distribution