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Lower Bounds on Asset Return Comovement

Bossaerts, Peter (1992) Lower Bounds on Asset Return Comovement. Social Science Working Paper, 797. California Institute of Technology , Pasadena, CA. (Unpublished) https://resolver.caltech.edu/CaltechAUTHORS:20170829-144805279

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Abstract

Under standard assumptions from dynamic asset pricing theory (value additivity, complete markets, rational expectations, and strict stationarity and ergodicity) and absence of arbitrage, lower bounds on the conditional and unconditional cross-moments of the returns on two assets a.re derived. They a.re expressed in terms of the second moment of a linear combination of option premia. The restrictions a.re probed with data from the foreign exchange market covering the period 1983-1991. Assuming that the value of the economy's benchmark payoff never exceeds one, and substituting linear projection for conditional expectation, several violations of the conditional lower bounds are discovered. The violations are attributed to unit roots in the data.


Item Type:Report or Paper (Working Paper)
ORCID:
AuthorORCID
Bossaerts, Peter0000-0003-2308-2603
Additional Information:The author is grateful for many helpful comments from participants in seminars at Stanford, Berkeley, Erasmus, ESSEC, HEC and Pompeu Fabra.
Group:Social Science Working Papers
Series Name:Social Science Working Paper
Issue or Number:797
Record Number:CaltechAUTHORS:20170829-144805279
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20170829-144805279
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80921
Collection:CaltechAUTHORS
Deposited By: Jacquelyn Bussone
Deposited On:30 Aug 2017 17:38
Last Modified:03 Oct 2019 18:36

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