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Stochastic Discount Factor Bounds with Conditioning Information

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  • Wayne E. Ferson
  • Andrew F. Siegel

Abstract

Hansen and Jagannathan (1991) (hereafter HJ) derive restrictions on the volatility of stochastic discount factors that price a given set of returns. This article studies the sampling properties of HJ bounds that use conditioning information. One approach is to multiply the returns by the lagged variables. We also study optimized HJ bounds with conditioning information from Gallant, Hansen, and Tauchen (1990) and based on portfolios derived in Ferson and Siegel (2001). We document striking finite-sample biases in the HJ bounds, where the bounds reject asset-pricing models too often. We provide a useful bias correction. We also evaluate asymptotic standard errors for the bounds from Hansen, Heaton, and Luttmer (1995). Copyright 2003, Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 16 (2003)
Issue (Month): 2 ()
Pages: 567-595

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Handle: RePEc:oup:rfinst:v:16:y:2003:i:2:p:567-595

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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April.
  2. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May.
  3. Burnside, Craig, 1994. "Hansen-Jagannathan Bounds as Classical Tests of Asset-Pricing Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(1), pages 57-79, January.
  4. John H. Cochrane & Lars Peter Hansen, 1993. "Asset Pricing Explorations for Macroeconomics," NBER Working Papers 4088, National Bureau of Economic Research, Inc.
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  15. Geert Bekaert, 2004. "Conditioning Information and Variance Bounds on Pricing Kernels," Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 339-378.
  16. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
  17. Gallant, A. Ronald & Hansen, Lars Peter & Tauchen, George, 1990. "Using conditional moments of asset payoffs to infer the volatility of intertemporal marginal rates of substitution," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 141-179.
  18. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  19. Ferson, Wayne E. & Foerster, Stephen R., 1994. "Finite sample properties of the generalized method of moments in tests of conditional asset pricing models," Journal of Financial Economics, Elsevier, vol. 36(1), pages 29-55, August.
  20. Ferson, Wayne E & Harvey, Campbell R, 1992. " Seasonality and Consumption-Based Asset Pricing," Journal of Finance, American Finance Association, vol. 47(2), pages 511-52, June.
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Citations

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Cited by:
  1. Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2005. "Testing affine term structure models in case of transaction costs," Open Access publications from Tilburg University urn:nbn:nl:ui:12-143126, Tilburg University.
  2. Peñaranda, Francisco & Sentana, Enrique, 2007. "Duality in Mean-Variance Frontiers with Conditioning Information," CEPR Discussion Papers 6566, C.E.P.R. Discussion Papers.
  3. Raymond Kan & Cesare Robotti, 2008. "The exact distribution of the Hansen-Jagannathan bound," Working Paper 2008-09, Federal Reserve Bank of Atlanta.
  4. Wayne E. Ferson & Jerchern Lin, 2013. "Alpha and Performance Measurement: The Effects of Investor Disagreement and Heterogeneity," NBER Working Papers 19349, National Bureau of Economic Research, Inc.
  5. Wayne E. Ferson & Andrew F. Siegel & Pisun (Tracy) Xu, 2005. "Mimicking Portfolios with Conditioning Information," NBER Working Papers 11020, National Bureau of Economic Research, Inc.
  6. Jonathan Fletcher & Andrew Marshall, 2014. "Investor Heterogeneity and the Cross-section of U.K. Investment Trust Performance," Journal of Financial Services Research, Springer, vol. 45(1), pages 67-89, February.
  7. Chrétien, Stéphane, 2012. "Bounds on the autocorrelation of admissible stochastic discount factors," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1943-1962.
  8. Liu, Ludan, 2008. "It takes a model to beat a model: Volatility bounds," Journal of Empirical Finance, Elsevier, vol. 15(1), pages 80-110, January.
  9. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc.
  10. Fletcher, Jonathan & Kihanda, Joseph, 2005. "An examination of alternative CAPM-based models in UK stock returns," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2995-3014, December.
  11. Abhyankar, Abhay & Basu, Devraj & Stremme, Alexander, 2007. "Portfolio efficiency and discount factor bounds with conditioning information: An empirical study," Journal of Banking & Finance, Elsevier, vol. 31(2), pages 419-437, February.
  12. Galvani, Valentina & Gubellini, Stefano, 2013. "Mean–variance dominant trading strategies," Finance Research Letters, Elsevier, vol. 10(3), pages 142-150.
  13. Devraj Basu & Alexander Stremme, 2006. "Asset Pricing Anomalies and Time-varying Betas: A New Specification Test for Conditional Factor Models," Working Papers wpn06-15, Warwick Business School, Finance Group.

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