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Identification And Inference In Linear Stochastic Discount Factor Models
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Book Synopsis Identification and inference in linear stochastic discount factor models by : Craig Burnside
Download or read book Identification and inference in linear stochastic discount factor models written by Craig Burnside and published by . This book was released on 2010 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: When linear asset pricing models are estimated using excess return data, a normalization of the model must be selected. Several normalizations are equivalent when the model is correctly specified, but the identification conditions differ across normalizations. In practice, some or all of these identification conditions fail statistically when conventional consumption-based models are estimated, and inference is not robust across normalizations. Using asymptotic theory and Monte Carlo simulations, I present evidence that the lack of robustness in qualitative inference across normalizations can be attributed to model misspecification and lack of identification. I propose the use of tests for failure of the rank conditions. Using a calibrated model, I show that these tests are effective in detecting non-identified models.
Book Synopsis Identification and Inference in Linear Stochastic Discount Factor Models with Excess Returns by : Craig Burnside
Download or read book Identification and Inference in Linear Stochastic Discount Factor Models with Excess Returns written by Craig Burnside and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Efficient Factor Identification by : Ravi Sastry
Download or read book Efficient Factor Identification written by Ravi Sastry and published by . This book was released on 2015 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: Of the hundreds of published asset pricing anomalies, few have been properly tested to determine if they are admissible as true risk factors. Anomalies need not be risk factors, but they are often deployed in subsequent empirical tests as if they are. I leverage the equivalence between the linear factor (beta) model and the stochastic discount factor frameworks to show that the usual (Fama-MacBeth) statistical tests do not correspond to the null hypothesis of interest. These tests demonstrate only that the candidate risk factor is a viable trading strategy, in that it possesses a positive risk-adjusted return. I show that it is neither necessary nor sufficient for a risk factor to be a trading strategy, however. The sufficient statistic for whether a set of candidates are true risk factors is the multivariate analog of the Sharpe ratio, which accounts for the covariance structure of the factors. I present an MCMC procedure that efficiently estimates the multivariate Sharpe ratio and provides valid finite-sample inference.
Book Synopsis Portfolio Theory and Management by : H. Kent Baker
Download or read book Portfolio Theory and Management written by H. Kent Baker and published by Oxford University Press. This book was released on 2013-01-07 with total page 798 pages. Available in PDF, EPUB and Kindle. Book excerpt: Portfolio management is an ongoing process of constructing portfolios that balances an investor's objectives with the portfolio manager's expectations about the future. This dynamic process provides the payoff for investors. Portfolio management evaluates individual assets or investments by their contribution to the risk and return of an investor's portfolio rather than in isolation. This is called the portfolio perspective. Thus, by constructing a diversified portfolio, a portfolio manager can reduce risk for a given level of expected return, compared to investing in an individual asset or security. According to modern portfolio theory (MPT), investors who do not follow a portfolio perspective bear risk that is not rewarded with greater expected return. Portfolio diversification works best when financial markets are operating normally compared to periods of market turmoil such as the 2007-2008 financial crisis. During periods of turmoil, correlations tend to increase thus reducing the benefits of diversification. Portfolio management today emerges as a dynamic process, which continues to evolve at a rapid pace. The purpose of Portfolio Theory and Management is to take readers from the foundations of portfolio management with the contributions of financial pioneers up to the latest trends emerging within the context of special topics. The book includes discussions of portfolio theory and management both before and after the 2007-2008 financial crisis. This volume provides a critical reflection of what worked and what did not work viewed from the perspective of the recent financial crisis. Further, the book is not restricted to the U.S. market but takes a more global focus by highlighting cross-country differences and practices. This 30-chapter book consists of seven sections. These chapters are: (1) portfolio theory and asset pricing, (2) the investment policy statement and fiduciary duties, (3) asset allocation and portfolio construction, (4) risk management, (V) portfolio execution, monitoring, and rebalancing, (6) evaluating and reporting portfolio performance, and (7) special topics.
Book Synopsis Handbook of Exchange Rates by : Jessica James
Download or read book Handbook of Exchange Rates written by Jessica James and published by John Wiley & Sons. This book was released on 2012-05-29 with total page 674 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for Handbook of Exchange Rates “This book is remarkable. I expect it to become the anchor reference for people working in the foreign exchange field.” —Richard K. Lyons, Dean and Professor of Finance, Haas School of Business, University of California Berkeley “It is quite easily the most wide ranging treaty of expertise on the forex market I have ever come across. I will be keeping a copy close to my fingertips.” —Jim O’Neill, Chairman, Goldman Sachs Asset Management How should we evaluate the forecasting power of models? What are appropriate loss functions for major market participants? Is the exchange rate the only means of adjustment? Handbook of Exchange Rates answers these questions and many more, equipping readers with the relevant concepts and policies for working in today’s international economic climate. Featuring contributions written by leading specialists from the global financial arena, this handbook provides a collection of original ideas on foreign exchange (FX) rates in four succinct sections: • Overview introduces the history of the FX market and exchange rate regimes, discussing key instruments in the trading environment as well as macro and micro approaches to FX determination. • Exchange Rate Models and Methods focuses on forecasting exchange rates, featuring methodological contributions on the statistical methods for evaluating forecast performance, parity relationships, fair value models, and flow–based models. • FX Markets and Products outlines active currency management, currency hedging, hedge accounting; high frequency and algorithmic trading in FX; and FX strategy-based products. • FX Markets and Policy explores the current policies in place in global markets and presents a framework for analyzing financial crises. Throughout the book, topics are explored in-depth alongside their founding principles. Each chapter uses real-world examples from the financial industry and concludes with a summary that outlines key points and concepts. Handbook of Exchange Rates is an essential reference for fund managers and investors as well as practitioners and researchers working in finance, banking, business, and econometrics. The book also serves as a valuable supplement for courses on economics, business, and international finance at the upper-undergraduate and graduate levels.
Book Synopsis The Stochastic Discount Factor and the Generalized Method of Moments by : Eni Koci
Download or read book The Stochastic Discount Factor and the Generalized Method of Moments written by Eni Koci and published by . This book was released on 2006 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: The fundamental theorem of asset pricing in finance states that the price of any asset is its expected discounted payoff. Ideally, the payoff is discounted by a factor, which depends on parameters present in the market, and it should be unique, in the sense that financial derivatives should be able to be priced using the same discount factor. In theory, risk neutral valuation implies the existence of a positive random variable, which is called the stochastic discount factor and is used to discount the payoffs of any asset. Apart from asset pricing another use of stochastic discount factor is to evaluate the performance of the of hedge fund managers. Among many methods used to evaluate the stochastic discount factor, generalized method of moments has become very popular. In this paper we will see how generalized method of moments is used to evaluate the stochastic discount factor on linear models and the calculation of stochastic discount factor using generalized method of moments for the popular model in finance CAPM.
Book Synopsis Assessing Specification Errors in Stochastic Discount Factor Models by : Lars Peter Hansen
Download or read book Assessing Specification Errors in Stochastic Discount Factor Models written by Lars Peter Hansen and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.
Book Synopsis Conditional Nonlinear Stochastic Discount Factor Models as Alternative Explanations to Stock Price Momentum by :
Download or read book Conditional Nonlinear Stochastic Discount Factor Models as Alternative Explanations to Stock Price Momentum written by and published by . This book was released on 2008 with total page 158 pages. Available in PDF, EPUB and Kindle. Book excerpt: Existing linear asset pricing models do not fully explain the abnormal profits associated with prior-return portfolios. In addition, existing nonlinear consumption-based models produce implausible risk aversion coefficient values when applied to priorreturn portfolios. Measures based upon production instead of consumption reduce residual errors and drive risk aversion coefficients towards plausible values. Augmenting the existing models with a new production-based marginal utility growth proxy, supplemented by a production-based consumption proxy not previously applied to price prior-return portfolios, can explain the abnormal profits associated with prior-return portfolios and yield plausible risk aversion coefficient values.
Book Synopsis A Frequency Decomposition of Approximation Errors in Stochastic Discount Factor Models by : Timothy Cogley
Download or read book A Frequency Decomposition of Approximation Errors in Stochastic Discount Factor Models written by Timothy Cogley and published by . This book was released on 1997 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Handbook of Econometrics by : James Joseph Heckman
Download or read book Handbook of Econometrics written by James Joseph Heckman and published by Elsevier. This book was released on 2007 with total page 1013 pages. Available in PDF, EPUB and Kindle. Book excerpt: As conceived by the founders of the Econometric Society, econometrics is a field that uses economic theory and statistical methods to address empirical problems in economics. It is a tool for empirical discovery and policy analysis. The chapters in this volume embody this vision and either implement it directly or provide the tools for doing so. This vision is not shared by those who view econometrics as a branch of statistics rather than as a distinct field of knowledge that designs methods of inference from data based on models of human choice ...
Book Synopsis Bounds on the Autocorrelation of Admissible Stochastic Discount Factors by : Stéphane Chrétien
Download or read book Bounds on the Autocorrelation of Admissible Stochastic Discount Factors written by Stéphane Chrétien and published by . This book was released on 2005 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show how to use asset market data to restrict the admissible region for the first-order autocorrelation of the stochastic discount factor (SDF). We interpret this statistic as a measure of a model's economic time variation across two periods. Estimating bounds for nominal and real SDFs at monthly and quarterly frequencies, we find that the admissible autocorrelations are significantly negative, but greater than -0.02, implying that the bounds impose a strong restriction on candidate SDFs. We illustrate the relevancy of these findings by showing that some widely used consumption-based models are misspecified with respect to the autocorrelation bound. Finally, we examine the implications of our results for the admissibility of linear factor models and the appropriateness of empirical pricing factors.
Book Synopsis Handbook of Econometrics by : James J. Heckman
Download or read book Handbook of Econometrics written by James J. Heckman and published by Elsevier. This book was released on 2007-12-13 with total page 1013 pages. Available in PDF, EPUB and Kindle. Book excerpt: As conceived by the founders of the Econometric Society, econometrics is a field that uses economic theory and statistical methods to address empirical problems in economics. It is a tool for empirical discovery and policy analysis. The chapters in this volume embody this vision and either implement it directly or provide the tools for doing so. This vision is not shared by those who view econometrics as a branch of statistics rather than as a distinct field of knowledge that designs methods of inference from data based on models of human choice behavior and social interactions. All of the essays in this volume and its companion volume 6B offer guidance to the practitioner on how to apply the methods they discuss to interpret economic data. The authors of the chapters are all leading scholars in the fields they survey and extend.*Part of the renowned Handbooks in Economics Series*Updates and expands the exisiting Handbook of Econometrics volumes*An invaluable reference written by some of the world's leading econometricians.
Book Synopsis Dynamic Linear Models with R by : Giovanni Petris
Download or read book Dynamic Linear Models with R written by Giovanni Petris and published by Springer Science & Business Media. This book was released on 2009-06-12 with total page 258 pages. Available in PDF, EPUB and Kindle. Book excerpt: State space models have gained tremendous popularity in recent years in as disparate fields as engineering, economics, genetics and ecology. After a detailed introduction to general state space models, this book focuses on dynamic linear models, emphasizing their Bayesian analysis. Whenever possible it is shown how to compute estimates and forecasts in closed form; for more complex models, simulation techniques are used. A final chapter covers modern sequential Monte Carlo algorithms. The book illustrates all the fundamental steps needed to use dynamic linear models in practice, using R. Many detailed examples based on real data sets are provided to show how to set up a specific model, estimate its parameters, and use it for forecasting. All the code used in the book is available online. No prior knowledge of Bayesian statistics or time series analysis is required, although familiarity with basic statistics and R is assumed.
Book Synopsis Empirical Asset Pricing by : Wayne Ferson
Download or read book Empirical Asset Pricing written by Wayne Ferson and published by MIT Press. This book was released on 2019-03-12 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: An introduction to the theory and methods of empirical asset pricing, integrating classical foundations with recent developments. This book offers a comprehensive advanced introduction to asset pricing, the study of models for the prices and returns of various securities. The focus is empirical, emphasizing how the models relate to the data. The book offers a uniquely integrated treatment, combining classical foundations with more recent developments in the literature and relating some of the material to applications in investment management. It covers the theory of empirical asset pricing, the main empirical methods, and a range of applied topics. The book introduces the theory of empirical asset pricing through three main paradigms: mean variance analysis, stochastic discount factors, and beta pricing models. It describes empirical methods, beginning with the generalized method of moments (GMM) and viewing other methods as special cases of GMM; offers a comprehensive review of fund performance evaluation; and presents selected applied topics, including a substantial chapter on predictability in asset markets that covers predicting the level of returns, volatility and higher moments, and predicting cross-sectional differences in returns. Other chapters cover production-based asset pricing, long-run risk models, the Campbell-Shiller approximation, the debate on covariance versus characteristics, and the relation of volatility to the cross-section of stock returns. An extensive reference section captures the current state of the field. The book is intended for use by graduate students in finance and economics; it can also serve as a reference for professionals.
Book Synopsis A Stochastic Discount Factor Volatility Upper Bound in a Mean-Variance-Skewness World by : Valerio Potì
Download or read book A Stochastic Discount Factor Volatility Upper Bound in a Mean-Variance-Skewness World written by Valerio Potì and published by . This book was released on 2007 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper employs a stochastic discount factor (SDF) volatility upper bound to limit the attainable maximal Sharpe ratio and thus, together with a no arbitrage condition, to rule out quot;good deals.quot; While no-arbitrage and the SDF volatility bound imply relatively weak assumptions about investors' preferences and do not require the specification of a full-blown asset pricing theory, they do provide useful restrictions on factor model estimates. This is shown by imposing these restrictions in the estimation of various multifactor models that allow for a non-zero price of coskewness risk. Empirically, while coskewness explains cross-sectional variation in average excess returns not explained by the Fama and French (1996) factors, its price is of a much more modest magnitude than in unrestricted estimates.
Book Synopsis A Rehabilitation of Stochastic Discount Factor Methodology by : John Howland Cochrane
Download or read book A Rehabilitation of Stochastic Discount Factor Methodology written by John Howland Cochrane and published by . This book was released on 2001 with total page 7 pages. Available in PDF, EPUB and Kindle. Book excerpt: In a recent Journal of Finance article, Kan and Zhou (1999) find that the 'Stochastic discount factor' methodology using GMM is markedly inferior to traditional maximum likelihood even in a simple test of the static CAPM with i.i.d. normal returns. This result has gained wide attention. However, as Jagannathan and Wang (2001) point out, this result flows from a strange assumption: Kan and Zhou allow the ML estimate to know the mean market return ex-ante. I show how this information advantage explains Kan and Zhou's results. In fact, when treated symmetrically, the discount factor - GMM and traditional methodologies behave almost identically in linear i.i.d. environments
Book Synopsis Spurious Inference in Unidentified Asset-Pricing Models by : Nikolay Gospodinov
Download or read book Spurious Inference in Unidentified Asset-Pricing Models written by Nikolay Gospodinov and published by . This book was released on 2015 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies some seemingly anomalous results that arise in possibly misspecified and unidentified linear asset-pricing models estimated by maximum likelihood and one-step generalized method of moments (GMM). Strikingly, when useless factors (that is, factors that are independent of the returns on the test assets) are present, the models exhibit perfect fit, as measured by the squared correlation between the model's fitted expected returns and the average realized returns, and the tests for correct model specification have asymptotic power that is equal to the nominal size. In other words, applied researchers will erroneously conclude that the model is correctly specified even when the degree of misspecification is arbitrarily large. We also derive the highly nonstandard limiting behavior of these invariant estimators and their t-tests in the presence of identification failure. These results reveal the spurious nature of inference as useless factors are selected with high probability, while useful factors are driven out from the model. The practical relevance of our findings is demonstrated using simulations and an empirical application.
