An Agnostic and Practically Useful Estimator of the Stochastic Discount Factor
51 Pages Posted: 1 Jan 2020 Last revised: 20 Jul 2020
Date Written: June 13, 2020
We propose an estimator for the stochastic discount factor (SDF) that does not require macroeconomic proxies or preference assumptions. It depends only on observed asset returns, yet is immune to the form of the multivariate return distribution, including the distribution’s factor structure. Using US equity data, our estimator satisfies the Hansen/Jagannathan bounds.
Keywords: stochastic discount factor, pricing kernel, cross-sectional test
JEL Classification: G00
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