A CONTINUOUS-TIME ARBITRAGE-PRICING MODEL WITH STOCHASTIC VOLATILITY AND JUMPS

We formulate and test a continuous-time asset-pricing model using U.S. equity market data. We assume that stock returns are driven by common factors including random jump-size Poisson processes and Brownian mot ions with stochastic volatility. The model places overidentifying rest rictions on the mean returns, allowing one to identify risk-neutral pr obability distributions useful in pricing derivative securities. We te st for the restrictions and decompose moments of the asset returns int o the contributions made by different factors. Our econometric methods take full account of time aggregation.