Abstract

http://ssrn.com/abstract=1868232
 
 

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Variance Bounds on the Permanent and Transitory Components of Stochastic Discount Factors


Gurdip Bakshi


University of Maryland - Robert H. Smith School of Business

Fousseni Chabi-Yo


Ohio State University (OSU) - Fisher College of Business

December 20, 2011

Journal of Financial Economics (JFE), Forthcoming
Charles A. Dice Center Working Paper No. 2011-11
Fisher College of Business Working Paper No. 2011-03-011

Abstract:     
In this paper, we develop lower bounds on the variance of the permanent component and the transitory component, and on the variance of the ratio of the permanent to the transitory components of SDFs. Exactly solved eigenfunction problems are then used to study the empirical attributes of asset pricing models that incorporate long-run risk, external habit persistence, and rare disasters. Specific quantitative implications are developed for the variance of the permanent and the transitory components, the return behavior of the long-term bond, and the comovement between the transitory and the permanent components of SDFs.

Number of Pages in PDF File: 41

Keywords: Stochastic discount factors, permanent component, transitory component, variance bounds, asset pricing models, eigenfunction problems

JEL Classification: G11, G12, G13, C5, D24, D34

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Date posted: June 21, 2011 ; Last revised: February 18, 2012

Suggested Citation

Bakshi, Gurdip and Chabi-Yo, Fousseni, Variance Bounds on the Permanent and Transitory Components of Stochastic Discount Factors (December 20, 2011). Journal of Financial Economics (JFE), Forthcoming; Charles A. Dice Center Working Paper No. 2011-11; Fisher College of Business Working Paper No. 2011-03-011. Available at SSRN: http://ssrn.com/abstract=1868232 or http://dx.doi.org/10.2139/ssrn.1868232

Contact Information

Gurdip S. Bakshi
University of Maryland - Robert H. Smith School of Business ( email )
Department of Finance
College Park, MD 20742-1815
United States
301-405-2261 (Phone)
301-314-9157 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/gbakshi
Fousseni Chabi-Yo (Contact Author)
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614 292 8477 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/chabi-yo/

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