Assessing Specification Errors in Stochastic Discount Factor Models

Posted: 14 Mar 1996

See all articles by Lars Peter Hansen

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 3 versions of this paper

Date Written: September 1991, Revised November 1995

Abstract

In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on Chi-Square statistics associated with null hypotheses that models are correct, our measures of model performance do not reward variability of discount factors. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of our methods in assessing some alternative stochastic discount factor models that have been proposed in the literature.

JEL Classification: G1, G12, C1, C12, C13, E30

Suggested Citation

Hansen, Lars Peter and Jagannathan, Ravi, Assessing Specification Errors in Stochastic Discount Factor Models (September 1991, Revised November 1995). Available at SSRN: https://ssrn.com/abstract=7280

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

1101 E 58th ST
Chicago, IL 60637
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773-702-8170 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

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Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

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Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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