Large Sample Estimators of the Stochastic Discount Factor

106 Pages Posted: 7 Mar 2018 Last revised: 7 Feb 2019

See all articles by Soohun Kim

Soohun Kim

Georgia Institute of Technology - Scheller College of Business

Robert A. Korajczyk

Northwestern University

Date Written: February 5, 2019

Abstract

We propose estimators of the stochastic discount factor (SDF) using large cross-section of individual stocks. We suggest a correction for the small sample bias in a standard GMM estimator induced by having a finite time series and show how to use the correction in exploiting unbalanced panels of individual stock returns. Our estimators can utilize both a prespecified set of traded or non-traded factors implied by a specific asset pricing model and latent factors estimated by multivariate statistical methods. The estimators perform well in simulations designed to mimic the U.S. equity markets. A lasso penalized version of the estimators does a good job of excluding systematic but unpriced factors. We apply our SDF estimators to the 10,112 individual stock price dynamics in the U.S. over 50 years from 1976 to 2016, and identify which factors in popular asset pricing models command a price of risk.

Keywords: Asset Pricing, Factor Structure, Stochastic Discount Factor, SDF

JEL Classification: G1, G12

Suggested Citation

Kim, Soohun and Korajczyk, Robert A., Large Sample Estimators of the Stochastic Discount Factor (February 5, 2019). Georgia Tech Scheller College of Business Research Paper No. 18-10. Available at SSRN: https://ssrn.com/abstract=3131274 or http://dx.doi.org/10.2139/ssrn.3131274

Soohun Kim (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

Robert A. Korajczyk

Northwestern University ( email )

Kellogg School of Management
2211 Campus Drive, Room 4357
Evanston, IL 60208-0898
United States
847-491-8336 (Phone)
847-491-7781 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

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