Growth-Optimal Portfolio Restrictions On Asset Pricing Models
AbstractWe 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 InfoArticle provided by Cambridge University Press in its journal Macroeconomic Dynamics.
Volume (Year): 1 (1997)
Issue (Month): 02 (June)
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