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Arbitrage Free Dispersion


  • Piotr Orłowski

    (HEC Montreal)

  • Andras Sali


  • Fabio Trojani

    (Swiss Finance Institute; University of Geneva)


We develop a theory of arbitrage-free dispersion (AFD) that characterizes the testable restrictions of asset pricing models. AFD measures Jensen’s gap in the cumulant generating function of pricing kernels and returns. It implies a wide family of model-free dispersion constraints, which extend dispersion and co-dispersion bounds in the literature and are applicable with a unifying approach in multivariate and multiperiod settings. Empirically, the dispersion of stationary and martingale pricing kernel components in the benchmark long-run risk model yields a counterfactual dependence of short- vs. long-maturity bond returns and is insufficient for pricing optimal portfolios of market equity and short-term bonds.

Suggested Citation

  • Piotr Orłowski & Andras Sali & Fabio Trojani, 2019. "Arbitrage Free Dispersion," Swiss Finance Institute Research Paper Series 19-20, Swiss Finance Institute, revised Apr 2019.
  • Handle: RePEc:chf:rpseri:rp1920

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    Cited by:

    1. Pascal J. Maenhout & Andrea Vedolin & Hao Xing, 2020. "Generalized Robustness and Dynamic Pessimism," NBER Working Papers 26970, National Bureau of Economic Research, Inc.

    More about this item


    Arbitrage-Free Dispersion; Cumulant Generating Function; Convexity; Convex Inequalities; Jensen’s Gap; Pricing Kernel Bounds; Entropy; Long-Run Risk Models; Tests of Asset Pricing Models;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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