Risk premia in the stock market are assumed to move with time varying risk. We present a model in which the variance of time excess return of a portfolio depends on a state variable generated by a first-order Markov process. A model in which the realization of the state is known to economic...

Recent research based on variance ratios and multiperiod-return autocorrelations concludes that the stock market exhibits mean reversion in the sense that a return in excess of the average tends to be followed by partially offsetting returns in the opposite direction. Dividing history into...

When the instrumental variable is a poor one, in the sense of being weakly correlated with the variable it proxies, the small sample distribution of the IV estimator is concentrated around a value that is inversely related to the feedback in the system and which is often further from the true...

New results on the exact small sample distribution of the instrumental variable estimator are presented by studying an important special case. The exact closed forms for the probability density and cumulative distribution functions are given. There are a number of surprising findings. The small...

Recent research suggests that stock returns are predictable from fundamentals such as dividend yield, and that the degree of predictability rises with the length of the horizon over which return is measured. This paper investigates the magnitude of two sources of small simple bias in these...

A new model is proposed for representinq the term to maturity structure of interest rates at a point in time.The model produces humped, monotonic and S-shaped yield curves using four parameters. Conditional on a time decay parameter, estimates of the other three are obtained by least squares....

The main econometric issue in testing the Lucas hypothesis (1973) in a times series context is the estimation of the variance conditional on past information. The ARCH model, proposed by Engle (1982), is one way of specifying the conditional variance. But the assumption underlying the ARCH...

Recent research has proposed the state space (88) framework for decomposition of GNP and other economic time series into trend and cycle components, using the Kalman filter. This paper reviews the empirical evidence and suggests that the resulting decomposition may be spurious, just as...

Hall (1978) showed that the permanent income hypothesis implies that consumption (1) follows a random walk, and (2) cannot be predicted by past income. Reexamination of Hall's data results in rejection of the random walk hypothesis in favor of the alternative hypothesis of positively...

Estimates of the natural or full employment level of real GNP have usually been obtained by statistical detrending procedures which assume independence between trend and cycle. This paper presents an alternative approach which says that the natural level should be measured in the context of a...