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Studying the Implications of Consumption and Asset Return Data for Stochastic Discount Factors in Incomplete International Economies

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  • Gurdip Bakshi
  • Mario Cerrato
  • John Crosby

Abstract

We develop an incomplete markets framework to synthesize domestic and foreign stochastic discount factors (SDFs) that are consistent with limited international risk sharing. The funda- mental departure in our paper is that exchange rate growth need not equal the ratio of SDFs, and we develop a restriction that precludes “good deals” in international economies with in- complete markets. Our innovation is to study an incomplete markets problem that is consistent with SDFs that (i) are nonnegative, (ii) correctly price returns, and (iii) disallow “good deals.”

Suggested Citation

  • Gurdip Bakshi & Mario Cerrato & John Crosby, 2016. "Studying the Implications of Consumption and Asset Return Data for Stochastic Discount Factors in Incomplete International Economies," Working Papers 2017_01, Business School - Economics, University of Glasgow.
  • Handle: RePEc:gla:glaewp:2017_01
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    References listed on IDEAS

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    Keywords

    Incomplete markets; stochastic discount factors; unspanned components; limited risk sharing;

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