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Evaluating stochastic discount factors from term structure models

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  • Farnsworth, Heber K.
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    Abstract

    This paper examines the feasibility of applying the stochastic discount factor methodology to fixed-income data using modern term structure models. Using this approach the researcher can examine returns on bond portfolios whose exact composition is unknown, as is often the case. This paper proposes an observable proxy for the SDF from continuous-time models and documents via Monte Carlo methods the properties of the GMM estimator based on using this proxy.

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    File URL: http://www.sciencedirect.com/science/article/B6VFG-4WMDHGP-1/2/67d33ea83f5fc7875b661c973bc17e95
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 16 (2009)
    Issue (Month): 5 (December)
    Pages: 852-861

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    Handle: RePEc:eee:empfin:v:16:y:2009:i:5:p:852-861

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    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Stochastic discount factors Term structure models Monte Carlo method GMM estimator;

    References

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    1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    2. Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
    3. Jefferson Duarte, 2004. "Evaluating an Alternative Risk Preference in Affine Term Structure Models," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 379-404.
    4. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
    5. Wayne Ferson & Tyler R. Henry & Darren J. Kisgen, 2006. "Evaluating Government Bond Fund Performance with Stochastic Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 423-455.
    6. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
    7. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
    8. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
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    Cited by:
    1. Ayadi, Mohamed A. & Kryzanowski, Lawrence, 2011. "Fixed-income fund performance: Role of luck and ability in tail membership," Journal of Empirical Finance, Elsevier, vol. 18(3), pages 379-392, June.

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