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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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    References

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    Cited by:
    1. 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.

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