A stochastic discount factor approach to asset pricing using panel data asymptotics
Using the Pricing Equation in a panel-data framework, we construct a novel consistent estimator of the stochastic discount factor (SDF) which relies on the fact that its logarithm is the "common feature" in every asset return of the economy. Our estimator is a simple function of asset returns and does not depend on any parametric function representing preferences. The techniques discussed in this paper were applied to two relevant issues in macroeconomics and finance: the first asks what type of parametric preference-representation could be validated by asset-return data, and the second asks whether or not our SDF estimator can price returns in an out-of-sample forecasting exercise. In formal testing, we cannot reject standard preference specifications used in the macro/finance literature. Estimates of the relative risk-aversion coefficient are between 1 and 2, and statistically equal to unity. We also show that our SDF proxy can price reasonably well the returns of stocks with a higher capitalization level, whereas it shows some difficulty in pricing stocks with a lower level of capitalization.
|Date of creation:||27 May 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Praia de Botafogo 190, sala 1100, Rio de Janeiro/RJ - CEP: 22253-900|
Web page: http://epge.fgv.br
More information through EDIRC
References listed on IDEAS
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.:
- Garcia, R. & Luger, R. & Renault, E., 2001.
"Empirical Assessment of an Intertemporal option Pricing Model with Latent variables,"
Cahiers de recherche
2001-10, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Garcia, Rene & Luger, Richard & Renault, Eric, 2003. "Empirical assessment of an intertemporal option pricing model with latent variables," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 49-83.
- GARCIA,René & LUGER, Richard & RENAULT, Éric, 2001. "Empirical Assessment of an Intertemporal Option Pricing Model with Latent variables," Cahiers de recherche 2001-10, Universite de Montreal, Departement de sciences economiques.
- René Garcia & Richard Luger & Eric Renault, 2000. "Empirical Assessment of an Intertemporal Option Pricing Model with Latent Variables," Working Papers 2000-56, Centre de Recherche en Economie et Statistique.
- Richard Blundell & Martin Browning & Costas Meghir, 1994.
"Consumer Demand and the Life-Cycle Allocation of Household Expenditures,"
Review of Economic Studies,
Oxford University Press, vol. 61(1), pages 57-80.
- Richard Blundell & Martin Browning & Costas Meghir, 1993. "Consumer demand and the life-cycle allocation of household expenditures," IFS Working Papers W93/11, Institute for Fiscal Studies.
- Chapman, D.A., 1996.
"Approximating the Asset Pricing Kernel,"
96-02, Rochester, Business - Financial Research and Policy Studies.
- Sentana, E., 2000.
"Factor Representing Portfolios in Large Asset Markets,"
0001, Centro de Estudios Monetarios Y Financieros-.
- Sentana, Enrique, 2004. "Factor representing portfolios in large asset markets," Journal of Econometrics, Elsevier, vol. 119(2), pages 257-289, April.
- repec:rim:rimwps:40-07 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:fgv:epgewp:717. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Núcleo de Computação da EPGE)
If references are entirely missing, you can add them using this form.