We provide an entropy approach for measuring asymmetric comovement between the return on a single asset and the market return. This approach yields a model-free test for stock return asymmetry, generalizing the correlation-based test proposed by Hong, Tu, and Zhou (2007). Based on this test, we...

We estimate a continuous-time model with stochastic volatility and dynamic crash probability for the S&P 500 index and find that market illiquidity dominates other factors in explaining the stock market crash risk. While the crash probability is time-varying, its dynamic depends only weakly on...

The use of fundamentalist traders in the stock market models is problematic since fundamental values in the real world are unknown. Yet, in the literature to date, fundamentalists are often required to replicate key stylized facts. The authors present an agent-based model of the stock market in...

We propose a new nonparametric test to identify mutually exciting jumps in high frequency data. We derive the asymptotic properties of the test statistics and show that the tests have good size and reasonable power in finite sample cases. Using our mutual excitation tests, we empirically...

We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of both lagged volatility and returns. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it...

Introducing bounded rationality into a standard consumption based asset pricing model with a representative agent and time separable preferences strongly improves empirical performance. Learning causes momentum and mean reversion of returns and thereby excess volatility, persistence of...

We estimate time-varying expected excess returns on the US stock market from 1983 to 2008 using a model that jointly captures the arbitrage-free dynamics of stock returns and nominal bond yields. The model nests the class of affine term structure (of interest rates) models. Stock returns and...

In this paper, we address the question whether the impact of default risk on equity returns depends on the financial system firms operate in. Using an implementation of Merton's option-pricing model for the value of equity to estimate firms' default risk, we construct a factor that measures the...

This paper presents theoretical models and their empirical results for the return and variance dynamics of German stocks. A factor structure is used in order to allow for a parsimonious modeling of the first two moments of returns. Dynamic factor models with GARCH dynamics (GARCH(1,1)-M,...