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Production-based measures of risk for asset pricing

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  • Belo, Frederico
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    Abstract

    A stochastic discount factor for asset returns is recovered from equilibrium marginal rates of transformation inferred from producers' first-order conditions. The marginal rate of transformation implies a novel macro-factor asset pricing model that does a reasonable job explaining the cross-sectional variation in average stock returns with plausible parameter values. Using a flexible representation of firms' production technology, producers' ability to transform output across states of nature is estimated to be high, in contrast with what is typically assumed in standard aggregate representations of firms' production technology.

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    Bibliographic Info

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

    Volume (Year): 57 (2010)
    Issue (Month): 2 (March)
    Pages: 146-163

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    Handle: RePEc:eee:moneco:v:57:y:2010:i:2:p:146-163

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    Web page: http://www.elsevier.com/locate/inca/505566

    Related research

    Keywords: Production-based asset pricing Production under uncertainty Cross-sectional asset pricing Marginal rate of transformation;

    References

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    Cited by:
    1. Lin, Xiaoji & Zhang, Lu, 2013. "The investment manifesto," Journal of Monetary Economics, Elsevier, vol. 60(3), pages 351-366.
    2. Lin, Xiaoji & Zhang, Lu, 2011. "Covariances versus Characteristics in General Equilibrium," Working Paper Series 2011-15, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    3. Urban Jermann, 2006. "The Equity Premium Implied by Production," NBER Working Papers 12487, National Bureau of Economic Research, Inc.
    4. Jermann, Urban J., 2013. "A production-based model for the term structure," Journal of Financial Economics, Elsevier, vol. 109(2), pages 293-306.
    5. Francois Gourio, 2007. "Putty-Clay Technology And Stock Market Volatility," Boston University - Department of Economics - Working Papers Series WP2007-005, Boston University - Department of Economics.
    6. Lin, Xiaoji, 2012. "Endogenous Technological Progress and the Cross Section of Stock Returns," Working Paper Series 2012-22, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

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