The Feller diffusion, filter rules and abnormal stock returns

Paul Docherty, Yizhe Dong, Xiaojing Song, Mark Tippett

Research output: Contribution to journalArticle

3 Citations (Scopus)
4 Downloads (Pure)

Abstract

We determine the conditional expected logarithmic (that is, continuously compounded) return on a stock whose price evolves in terms of the Feller diffusion and then use it to demonstrate how one must know the exact probability density that describes a stock’s return before one can determine the correct way to calculate the abnormal returns that accrue on the stock. We show in particular that misspecification of the stochastic process which generates a stock’s price will lead to systematic biases in the abnormal returns calculated on the stock. We examine the implications this has for the proper conduct of empirical work and for the evaluation of stock and portfolio performance.
Original languageEnglish
Pages (from-to)426-438
Number of pages13
JournalEuropean Journal of Finance
Volume24
Issue number5
Early online date5 Apr 2017
DOIs
Publication statusPublished - 2018

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Keywords

  • Feller diffusion
  • Fokker-Planck equation
  • Geometric Brownian Motion
  • Logarithmic return

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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