Stochastic Discount Factors with Cross-Asset Spillovers

Abstract

This paper develops a structured asset-pricing framework for estimating the stochastic discount factor (SDF) by aggregating firm-level signals while accounting for informational linkages across assets. The method identifies which characteristics are most relevant for pricing and uncovers the directional flow of predictive influence among firms. Empirically, the resulting SDF delivers strong out-of-sample performance across asset universes and market regimes. Moreover, large, low-turnover firms emerge as central nodes in the information network. The framework provides a transparent and economically grounded view of the informational structure embedded in return dynamics.

Keywords: Asset Pricing, Cross-Asset Spillover, Connection Matrix, Sharpe Ratio

JEL Classification: C1, G11, G12