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Stochastic Discount Factor Bounds with Conditioning Information

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Author Info
Wayne E. Ferson
Andrew F. Siegel

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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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File URL: http://hdl.handle.net/10.1093/rfs/hhg004
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Article provided by Oxford University Press for 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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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. [Downloadable!] (restricted)
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  2. 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. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Hansen, Lars Peter & Heaton, John & Luttmer, Erzo G J, 1995. "Econometric Evaluation of Asset Pricing Models," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(2), pages 237-74. [Downloadable!] (restricted)
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  5. John H. Cochrane, 1996. "A Cross-Sectional Test of a Production-Based Asset Pricing Model," NBER Working Papers 4025, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Snow, Karl N, 1991. " Diagnosing Asset Pricing Models Using the Distribution of Asset Returns," Journal of Finance, American Finance Association, vol. 46(3), pages 955-83, July. [Downloadable!] (restricted)
  7. Robert J. Shiller, 1982. "Consumption, Asset Markets, and Macroeconomic Fluctuations," NBER Working Papers 0838, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, vol. 18(1), pages 91-110, March. [Downloadable!] (restricted)
  9. MacKinlay, A. Craig, 1987. "On multivariate tests of the CAPM," Journal of Financial Economics, Elsevier, vol. 18(2), pages 341-371, June. [Downloadable!] (restricted)
  10. Green, Richard C & Hollifield, Burton, 1992. " When Will Mean-Variance Efficient Portfolios Be Well Diversified?," Journal of Finance, American Finance Association, vol. 47(5), pages 1785-809, December. [Downloadable!] (restricted)
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  11. Heber Farnsworth & Wayne E. Ferson & David Jackson & Steven Todd, 2002. "Performance Evaluation with Stochastic Discount Factors," NBER Working Papers 8791, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. 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. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
  14. John H. Cochrane & Lars Peter Hansen, 1993. "Asset Pricing Explorations for Macroeconomics," NBER Working Papers 4088, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  16. Schwert, G William & Seguin, Paul J, 1990. " Heteroskedasticity in Stock Returns," Journal of Finance, American Finance Association, vol. 45(4), pages 1129-55, September. [Downloadable!] (restricted)
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  17. 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.
  18. 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. [Downloadable!] (restricted)
  19. 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. [Downloadable!] (restricted)
  20. Geert Bekaert & Jun Liu, 1999. "Conditioning Information and Variance Bounds on Pricing Kernels," NBER Working Papers 6880, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  21. Dybvig, Philip H & Ingersoll, Jonathan E, Jr, 1982. "Mean-Variance Theory in Complete Markets," Journal of Business, University of Chicago Press, vol. 55(2), pages 233-51, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Enrique Sentana & Francisco Peñaranda, 2007. "Duality In Mean-Variance Frontiers With Conditioning Information," Working Papers wp2007_0715, CEMFI. [Downloadable!]
    Other versions:
  2. Wayne E. Ferson & Andrew F. Siegel, 2006. "Testing Portfolio Efficiency with Conditioning Information," NBER Working Papers 12098, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Raymond Kan & Cesare Robotti, 2008. "The exact distribution of the Hansen-Jagannathan bound," Working Paper 2008-09, Federal Reserve Bank of Atlanta. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
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