Conditions for Myopic Valuation and Serial Independence of the Market Excess Return in Discrete Time Models

Authors

  • GUNTER FRANKE

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    • Universität Konstanz. The valuable comments of Michael Brennan, Helmut Laux, Mark Rubinstein, Richard Stapleton, and unknown referees are gratefully acknowledged. Any errors are mine, of course.

ABSTRACT

In a multiperiod pure exchange world with investors displaying HARA-preferences, conditions for period-by-period application of one-period asset pricing models are derived first. The future investment opportunity set may be uncertain, provided that in every period a specific market portfolio variable depending on preferences is known as of the preceding date. This variable need not be completely deterministic.

Second, conditions for a serially independent market excess return are derived. These conditions render serial independence very unlikely. Hence estimation methods assuming serial independence are likely to yield biased results.

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