Persistent risk factors in financial markets

This dissertation is structured as follows.

In Chapter 2 we introduce long-memory models, which will be the means for describing the persistence of financial risk factors throughout all chapters.

Chapter 3 focuses on the time-series properties of the short-term interest rate.

In Chapter 3, where we focus on the level of yields, we assume that the market price of risk is constant. In Chapter 4 we relax this assumption. We extend the term structure model of Chapter 3, introducing time variation in the risk premium.

In chapter 5 we investigate the consequences of persistent long-memory financial risk factors on the outcomes of empirical tests of present value models and return prediction. More precisely, we use co-fractional models to evaluate the predictive relations between returns and a valuation ratio.

In Chapter 5 expected returns are associated with a valuation ratio. For the housing market, the financial risk factor is proxied by the rent to price ratio. In contrast, in Chapter 6 we consider uncertainty in the stock market as directly observable through the use of high-frequency volatility option market data.