Stochastic Discount Factor Bounds with Conditioning Information

48 Pages Posted: 14 Feb 2002 Last revised: 26 Oct 2010

See all articles by Wayne E. Ferson

Wayne E. Ferson

University of Southern California; National Bureau of Economic Research (NBER)

Andrew F. Siegel

University of Washington - Department of Finance and Business Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2002

Abstract

Hansen and Jagannathan (HJ, 1991) describe restrictions on the volatility of stochastic discount factors (SDFs) that price a given set of asset returns. This paper compares the sampling properties of different versions of HJ bounds that use conditioning information in the form of a given set of lagged instruments. HJ describe one way to use conditioning information. Their approach is to multiply the original returns by the lagged variables, and much of the asset pricing literature to date has followed this ihmultiplicativel. approach. We also study two versions of optimized HJ bounds with conditioning information. One is from Gallant, Hansen and Tauchen (1990) and the second is based on the unconditionally-efficient portfolios derived in Ferson and Siegel (2000). We document finite-sample biases in the HJ bounds, where the biased bounds reject asset-pricing models too often. We provide useful correction factors for the bias. We also evaluate the asymptotic standard errors for the HJ bounds, from Hansen, Heaton and Luttmer (1995).

Suggested Citation

Ferson, Wayne E. and Siegel, Andrew F., Stochastic Discount Factor Bounds with Conditioning Information (February 2002). NBER Working Paper No. w8789, Available at SSRN: https://ssrn.com/abstract=300751

Wayne E. Ferson (Contact Author)

University of Southern California ( email )

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HOME PAGE: http://www-rcf.usc.edu/~ferson/

National Bureau of Economic Research (NBER)

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Andrew F. Siegel

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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