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Bounds on the autocorrelation of admissible stochastic discount factors

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  • Chrétien, Stéphane
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    Abstract

    We show how to use asset market data to restrict the admissible region for the first-order autocorrelation of the stochastic discount factor (SDF). We interpret this statistic as a measure of a model’s economic time variation across two periods. Estimating bounds for nominal and real SDFs at monthly and quarterly frequencies, we find that the admissible autocorrelations are significantly negative, but greater than −0.02, implying that the bounds impose a strong restriction on candidate SDFs. We illustrate the relevancy of these findings by showing that some widely used consumption-based models are misspecified with respect to the autocorrelation bound. Finally, we examine the implications of our results for the admissibility of linear factor models and the appropriateness of empirical pricing factors.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 7 ()
    Pages: 1943-1962

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:7:p:1943-1962

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

    Related research

    Keywords: Stochastic discount factor; Autocorrelation bounds; Asset pricing models; Time variation;

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    Cited by:
    1. Constantinos T. Artikis, 2012. "Formulating a Stochastic Discounting Model with Actuarial and Risk Management Applications," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 62(3-4), pages 7-15, July - De.

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