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

41 Pages Posted: 21 Jun 2011 Last revised: 18 Feb 2012

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business; Temple University - Fox School of Business and Management

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 20, 2011

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.

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

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

Suggested Citation

Bakshi, Gurdip S. and Bakshi, Gurdip S. 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: https://ssrn.com/abstract=1868232 or http://dx.doi.org/10.2139/ssrn.1868232

Gurdip S. Bakshi

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Fousseni Chabi-Yo (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

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