Agnostic Tests of Stochastic Discount Factor Theory
51 Pages Posted: 19 Apr 2015 Last revised: 14 Dec 2019
Date Written: November 22, 2015
We propose and implement tests for the existence of a common stochastic discount factor (SDF). Our tests are agnostic because they do not require macroeconomic data or preference assumptions; they depend only on observed asset returns. Our test statistic is immune to the form of the multivariate return distribution, including its factor structure. After examining test features and power with simulations, we apply the tests empirically to data on U.S. equities, bonds, currencies, commodities and real estate. The empirical evidence is consistent with a unique positive SDF that prices all U.S. assets and satisfies the Hansen/Jagannathan variance bound.
Keywords: Stochastic discount factor, asset pricing
JEL Classification: G1; G12
Suggested Citation: Suggested Citation