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Robust Economic Implications of Nonlinear Pricing Kernels

Caio Almeida

Getulio Vargas Foundation

René Garcia

EDHEC Business School

August 5, 2013

AFA 2009 San Francisco Meetings Paper

Based on a family of discrepancy functions, we derive nonparametric stochastic discount factor (SDFs) bounds that naturally generalize variance (Hansen and Jagannathan, 1991), entropy (Backus, Chernov and Martin, 2011), and higher-moment (Snow, 1991) bounds. These bounds are especially useful to identify how parameters affect pricing kernel dispersion in asset pricing models. In particular, they allow to distinguish between models where dispersion comes mainly from skewness from models where kurtosis is the primary source of dispersion. We analyze the admissibility of disaster and long-run risk models with respect to these bounds and gain important new insights on the role played by non-linearities in the pricing kernels and non-Gaussian features in the returns. Our bounds impose a data-driven balance between the amount of skewness and kurtosis that any admissible pricing kernel should satisfy.

Number of Pages in PDF File: 53

Keywords: Stochastic Discount Factor, Information-Theoretic Bounds, Generalized Minimum Contrast Estimators, Implicit Utility Maximizing Weights

JEL Classification: C1, C5, G1

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Date posted: March 25, 2008 ; Last revised: August 8, 2013

Suggested Citation

Almeida, Caio and Garcia, René, Robust Economic Implications of Nonlinear Pricing Kernels (August 5, 2013). AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1107997 or http://dx.doi.org/10.2139/ssrn.1107997

Contact Information

Caio Almeida (Contact Author)
Getulio Vargas Foundation ( email )
Praia de Botafogo 190, 11o andar
Rio de Janeiro, Rio de Janeiro 22250-900
5521-37995827 (Phone)
5521-2553-8821 (Fax)
HOME PAGE: http://www.fgv.br/professor/calmeida/
René Garcia
EDHEC Business School ( email )
58 rue du Port
Lille, 59046
Feedback to SSRN

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