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Abstract
This paper is concerned with the issue of dynamics in financial data and asset pricing models such as the CAPM. A literature review in this area is undertaken and highlights the need for a modern time series econometric approach in asset pricing. Such an approach is discussed and deals with problems related to structural breaks and microstructures, dynamics in the mean and variance process, and non-stationary regressions and cointegration. An empirical application using UK stock market data demonstrates the merit of the proposed methodology in correcting market model regressions.
ACKNOWLEDGEMENTS
Dr Markellos gratefully acknowledges financial support from the Royal Economic Society in the form of a junior fellowship. The authors thank the participants of the 5th International Conference on Forecasting Financial Markets (BNP/Imperial: May 1998, London), especially David Kroner, Chris Adcock, Renato Flôres and Nicholas Tessaromatis, for their constructive comments on earlier versions of this research. The usual disclaimer applies.