A Theory of Dissimilarity between Stochastic Discount Factors

Management Science, forthcoming

57 Pages Posted: 11 Sep 2017 Last revised: 13 Jul 2020

See all articles by Gurdip Bakshi

Gurdip Bakshi

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

Xiaohui Gao

Fox School of Business, Temple University

George Panayotov

Hong Kong University of Science & Technology (HKUST)

Date Written: September 19, 2017

Abstract

This paper proposes a measure of dissimilarity between stochastic discount factors (SDFs) in different economies. The SDFs are made comparable using the respective bond prices as the numeraire. The measure is dimensionless, synthesizes features of the risk-neutral moments of excess currency returns, and can be extracted from currency option prices. Linking theory to data, we provide evidence gathered from (i) the cross-section of 45 currency option prices, (ii) the time-series of currency returns, (iii) estimated SDFs using model-free restrictions, and (iv) structural models in international finance.

Keywords: Dissimilarity between SDFs

Suggested Citation

Bakshi, Gurdip S. and Bakshi, Gurdip S. and Gao, Xiaohui and Panayotov, George, A Theory of Dissimilarity between Stochastic Discount Factors (September 19, 2017). Management Science, forthcoming, Available at SSRN: https://ssrn.com/abstract=3034434 or http://dx.doi.org/10.2139/ssrn.3034434

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

Xiaohui Gao (Contact Author)

Fox School of Business, Temple University ( email )

Alter Hall 421
Philadelphia, PA 19122
United States

HOME PAGE: http://https://sites.google.com/site/xiaohuigaobakshi/

George Panayotov

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong
852-2358-5049 (Phone)
852-2358-1749 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
158
Abstract Views
1,035
rank
259,411
PlumX Metrics