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Variance bounds on the permanent and transitory components of stochastic discount factors

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  • Bakshi, Gurdip
  • Chabi-Yo, Fousseni
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    Abstract

    In this paper, we develop lower bounds on the variance of the permanent component and the transitory component, and on the variance of the ratio of the permanent to the transitory components of SDFs. Exactly solved eigenfunction problems are then used to study the empirical attributes of asset pricing models that incorporate long-run risk, external habit persistence, and rare disasters. Specific quantitative implications are developed for the variance of the permanent and the transitory components, the return behavior of the long-term bond, and the comovement between the transitory and the permanent components of SDFs.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 105 (2012)
    Issue (Month): 1 ()
    Pages: 191-208

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    Handle: RePEc:eee:jfinec:v:105:y:2012:i:1:p:191-208

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Stochastic discount factors; Permanent component; Transitory component; Variance bounds; Eigenfunction problems;

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    Cited by:
    1. Lars Peter Hansen, 2014. "Uncertainty Outside and Inside Economic Models," Working Papers, Becker Friedman Institute for Research In Economics 2014-06, Becker Friedman Institute for Research In Economics.
    2. Hanno Lustig & Andreas Stathopoulos & Adrien Verdelhan, 2013. "The Term Structure of Currency Carry Trade Risk Premia," NBER Working Papers 19623, National Bureau of Economic Research, Inc.
    3. Jaroslav Borovička & Lars P. Hansen & José A. Scheinkman, 2014. "Misspecified Recovery," NBER Working Papers 20209, National Bureau of Economic Research, Inc.
    4. Lars Peter Hansen, 2014. "Uncertainty Outside and Inside Economic Models," NBER Working Papers 20394, National Bureau of Economic Research, Inc.

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