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Title:Why Do Asset Prices Not Follow Random Walks? PDF Logo
Authors:Franke, Günter
Lüders, Erik
Issue Date:2004
Series/Report no.:Discussion paper series / Universität Konstanz, Center of Finance and Econometrics (CoFE) 04/05
Abstract:This paper analyzes the e¤ect of non-constant elasticity of the pricing kernel on asset return characteristics in a rational expectations model. It is shown that declining elasticity of the pricing kernel can lead to predictability of asset returns and high and persistent volatility. Also, declining elasticity helps to motivate technical analysis and to explain stock market crashes. Moreover, based on a general characterization of the pricing kernel, we propose analytical asset price processes which can be tested empirically. The numerical analysis reveals strong deviations from the geometric Brownian motion which are caused by declining elasticity of the pricing kernel.
Subjects:Pricing Kernel
Viable asset price processes
Serial correlation
Heteroskedasticity
Stock market crashes
JEL:G12
Persistent Identifier of the first edition:urn:nbn:de:bsz:352-opus-17565
Document Type:Working Paper
Appears in Collections:CoFE-Diskussionspapiere, Universität Konstanz

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