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

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

Gurdip Bakshi

University of Maryland - Robert H. Smith School of Business

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 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

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://scholar.rhsmith.umd.edu/gbakshi/Home?destination=Home

Fousseni Chabi-Yo (Contact Author)

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

Amherst, MA 01003-4910
United States

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