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Growth-Optimal Portfolio Restrictions On Asset Pricing Models

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  • BANSAL, RAVI
  • LEHMANN, BRUCE N.

Abstract

We show that absence of arbitrage in frictionless markets implies a lower bound on the average of the logarithm of the reciprocal of the stochastic discount factor implicit in asset pricing models. The greatest lower boundfor a given asset menu is the average continuously compounded return on itsgrowth-optimal portfolio. We use this bound to evaluate the plausibility ofvarious parametric asset pricing models to characterize financial marketpuzzles such as the equity premium puzzle and the risk-free ratepuzzle. We show that the insights offered by the growth-optimal boundsdiffer substantially from those obtained by other nonparametric bounds.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 1 (1997)
Issue (Month): 02 (June)
Pages: 333-354

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Handle: RePEc:cup:macdyn:v:1:y:1997:i:02:p:333-354_00

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Cited by:
  1. Lars Peter Hansen & Jose Scheinkman, 2006. "Long Term Risk: An Operator Approach," NBER Working Papers 12650, National Bureau of Economic Research, Inc.
  2. Alvarez, Fernando & Jermann, Urban J., 2001. "The Size of the Permanent Component of Asset Pricing Kernels," Working Papers 01-4, University of Pennsylvania, Wharton School, Weiss Center.
  3. David Backus & Mikhail Chernov & Stanley Zin, 2011. "Sources of Entropy in Representative Agent Models," Working Papers 11-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  4. Lars Peter Hansen, 2012. "Risk Pricing over Alternative Investment Horizons," Working Papers 2012-008, Becker Friedman Institute for Research In Economics.
  5. Lars Peter Hansen, 2008. "Modeling the Long Run: Valuation in Dynamic Stochastic Economies," NBER Working Papers 14243, National Bureau of Economic Research, Inc.
  6. Fung, William & Hsieh, David A., 1999. "Is mean-variance analysis applicable to hedge funds?," Economics Letters, Elsevier, vol. 62(1), pages 53-58, January.
  7. Vladimir Cherny & Jan Obloj, 2011. "Portfolio optimisation under non-linear drawdown constraints in a semimartingale financial model," Papers 1110.6289, arXiv.org, revised Apr 2013.
  8. Lars Peter Hansen, 2014. "Uncertainty Outside and Inside Economic Models," Working Papers 2014-06, Becker Friedman Institute for Research In Economics.
  9. DeRoon, Frans A. & Nijman, Theo E., 2001. "Testing for mean-variance spanning: a survey," Journal of Empirical Finance, Elsevier, vol. 8(2), pages 111-155, May.
  10. Koijen, Ralph & Lustig, Hanno & van Nieuwerburgh, Stijn, 2012. "The Cross-Section and Time-Series of Stock and Bond Returns," CEPR Discussion Papers 9024, C.E.P.R. Discussion Papers.
  11. Ian Martin, 2011. "The Forward Premium Puzzle in a Two-Country World," NBER Working Papers 17564, National Bureau of Economic Research, Inc.
  12. Chrétien, Stéphane, 2012. "Bounds on the autocorrelation of admissible stochastic discount factors," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1943-1962.
  13. Jaroslav Borovička & Lars P. Hansen & José A. Scheinkman, 2014. "Misspecified Recovery," NBER Working Papers 20209, National Bureau of Economic Research, Inc.

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