Please use this identifier to cite or link to this item: http://hdl.handle.net/2440/57060
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Type: Journal article
Title: Multiple Priors and Asset Pricing
Author: Madan, D.
Elliott, R.
Citation: Methodology and Computing in Applied Probability, 2009; 11(2):211-229
Publisher: Kluwer Academic Publishers
Issue Date: 2009
ISSN: 1387-5841
1573-7713
Statement of
Responsibility: 
Dilip B. Madan and Robert J. Elliott
Abstract: The asset pricing implications of a statistical model consistent with multiple priors, or beliefs about return distributions, are developed. It is shown that quite generally equilibrium differences in mean returns across priors are to be explained in terms of perceived risk differences between these priors. Advances in filtering theory are employed on time series data to filter all the multiple state conditional components of risks and rewards. It is then observed that excess return differentials across priors are broadly consistent with required risk compensations under these priors, though the sharp hypothesis of zero intercept and unit slope is rejected. The filtered results also deliver numerous other interesting statistics. Here we focus on the construction of long horizon return distributions from data on daily returns using a Markov chain approach to incorporate stochasticity in elementary risk characterizations like volatility, skewness and kurtosis.
Keywords: Variance gamma; Two state filtering; Asset pricing
RMID: 0020094885
DOI: 10.1007/s11009-007-9051-5
Appears in Collections:Mathematical Sciences publications

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