Real-Time Distribution of Stochastic Discount Factors
117 Pages Posted: 16 Feb 2018 Last revised: 8 Jan 2019
Date Written: January 1, 2019
I use option prices to infer real-time moments of stochastic discount factors (SDFs). The moments are estimated, from daily SP 500 index option data, in real time, without relying on past observations. These moments are forward-looking and significantly predict the market excess return. The theory suggests that the SDF variance (kurtosis) is positively priced while the SDF skewness is negatively priced in the cross section of returns. A cross-sectional analysis shows that the price of risks associated with the moments of the SDF are economically and statistically significant after controlling for a comprehensible set of economic variables.
Keywords: Variance, Skewness, Kurtosis, Stochastic Discount Factor, Risk Premium, Price of Risk, Cross-Section, Predictability
JEL Classification: E44, G1, G11, G12
Suggested Citation: Suggested Citation