Estimation of continuous-time models for stock returns and interest rates
Abstract
Efficient Method of Moments is used to estimate and test continuous-time diffusion
models for stock returns and interest rates. For stock returns, a four-state, two-factor
diffusion with one state observed can account for the dynamics of the daily return
on the S&P Composite Index, 1927-1987. This contrasts with results indicating that
discrete-time, stochastic volatility models cannot explain these dynamics. For interest
rates, a trivariate Yield-Factor Model is estimated from weekly, 1962-1995, Treasury
rates. The Yield-Factor Model is sharply rejected, although extensions permitting
convexities in the local variance come closer to fitting the data.
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George E. Tauchen
William Henry Glasson Distinguished Professor of Economics
George Tauchen is the William Henry Glasson Professor of Economics and professor of
finance at the Fuqua School of Business. He joined the Duke faculty in 1977 after
receiving his Ph.D. from the University of Minnesota. He did his undergraduate work
at the University of Wisconsin. Professor Tauchen is a fellow of the Econometric Society,
the American Statistical Association, the Journal of Econometrics, and the Society
for Financial Econometrics (SoFie). He is also the 2003 Duke University Sc

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