Inference on Risk-Neutral Measures for Incomplete Markets

Posted: 30 Jun 2009

See all articles by Hiroaki Kaido

Hiroaki Kaido

Boston University - Department of Economics

Halbert L. White, Jr.

University of California, San Diego (UCSD) - Department of Economics

Date Written: Summer 2009

Abstract

This paper proposes an econometric framework to estimate market risk prices associated with risk-neutral measures Q under incomplete markets. We show that, under incomplete markets, the market price of risk is not point-identified but is instead identified as a bounded subset of an affine subspace. On the other hand, a structural assumption fully identifies diffusion coefficients for the data-generating probability measure P. We apply Kaido and White's (, Discussion Paper, University of California, San Diego) two-stage extension of Chernozhukov, Hong, and Tamer's (, Econometrica, 75(5), 1243-1284) partial identification framework to construct a set estimator and confidence regions for the identified set of market risk prices and to test hypotheses. We apply our results to study international risk sharing and risk premiums for market cap range indexes.

Keywords: C12, C13, G12, incomplete markets, partial identification, risk-neutral measure, set estimation

Suggested Citation

Kaido, Hiroaki and White, Halbert L., Inference on Risk-Neutral Measures for Incomplete Markets (Summer 2009). Journal of Financial Econometrics, Vol. 7, Issue 3, pp. 199-246, 2009, Available at SSRN: https://ssrn.com/abstract=1425980 or http://dx.doi.org/nbp004

Hiroaki Kaido (Contact Author)

Boston University - Department of Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Halbert L. White

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-3502 (Phone)
858-534-7040 (Fax)

HOME PAGE: http://www.econ.ucsd.edu/~mbacci/white/

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