Conditioning Information and Variance Bounds on Pricing Kernels

44 Pages Posted: 9 Oct 2001

See all articles by Geert Bekaert

Geert Bekaert

Columbia University - Columbia Business School, Finance

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

Abstract

We show how to use conditioning information optimally to construct a sharper unconditional Hansen-Jagannathan (1991) bound. The approach in this paper is different from that of Gallant, Hansen and Tauchen (1990), but both approaches yield the same bound when the conditional moments are known. Unlike Gallant, Hansen and Tauchen, our approach is robust to misspecification of the first and second conditional moments. Potential applications include testing dynamic asset pricing models, studying the predictability of asset returns, diagnosing the accuracy of competing models for the first and second conditional moments of asset returns, dynamic asset allocation and mutual fund performance measurement. The illustration in this article starts with the familiar Hansen-Singleton (1983) setup of an autoregressive model for consumption growth and bond and stock returns. Our innovation is to add time-varying volatility to the model. Both an unconstrained version and a version with the restrictions of the standard consumption-based asset pricing model imposed serve as the data-generating processes to illustrate the behavior of the bounds. In the process, we discover and explore an interesting empirical phenomenon: asymmetric volatility in consumption growth.

JEL Classification: G12

Suggested Citation

Bekaert, Geert and Liu, Jun, Conditioning Information and Variance Bounds on Pricing Kernels (June 2001). Available at SSRN: https://ssrn.com/abstract=275891 or http://dx.doi.org/10.2139/ssrn.275891

Geert Bekaert (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

NY
United States

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States
858.534.2022 (Phone)
5858.534.0745 (Fax)

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