Real-Time Distribution of Stochastic Discount Factors

117 Pages Posted: 16 Feb 2018 Last revised: 8 Jan 2019

See all articles by Fousseni Chabi-Yo

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Date Written: January 1, 2019

Abstract

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

Chabi-Yo, Fousseni, Real-Time Distribution of Stochastic Discount Factors (January 1, 2019). Available at SSRN: https://ssrn.com/abstract=3118460 or http://dx.doi.org/10.2139/ssrn.3118460

Fousseni Chabi-Yo (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

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