Semiparametric Estimation of Latent Variable Asset Pricing Models

54 Pages Posted: 22 Jul 2020 Last revised: 2 May 2023

See all articles by Jeroen Dalderop

Jeroen Dalderop

University of Notre Dame - Department of Economics

Date Written: April 30, 2023

Abstract

This paper studies semiparametric identification and estimation of consumption-based asset pricing models with latent state variables. First, we measure how consumption, dividends, and prices depend on Markovian state variables describing aggregate output growth. Subsequently, we identify state-dependent components in the stochastic discount factor using the Euler equation. We develop tractable algorithms for filtering, smoothing, and sieve maximum likelihood estimation, and establish its consistency. Empirically, we find sizable nonlinearities in the impact of expected growth and volatility on the price-dividend ratio and discount factor.

Keywords: Asset Prices, Volatility, Risk Aversion, Latent Variables, Semiparametric Estimation

JEL Classification: C14, C58, G12

Suggested Citation

Dalderop, Jeroen, Semiparametric Estimation of Latent Variable Asset Pricing Models (April 30, 2023). Journal of Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3638365 or http://dx.doi.org/10.2139/ssrn.3638365

Jeroen Dalderop (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

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