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The Stochastic Discount Factor
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Download or read book Asset Pricing written by John H. Cochrane and published by Princeton University Press. This book was released on 2009-04-11 with total page 560 pages. Available in PDF, EPUB and Kindle. Book excerpt: Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
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 Advanced Finance Theories by : Ser-huang Poon
Download or read book Advanced Finance Theories written by Ser-huang Poon and published by World Scientific. This book was released on 2018-03-08 with total page 226 pages. Available in PDF, EPUB and Kindle. Book excerpt: For PhD finance courses in business schools, there is equal emphasis placed on mathematical rigour as well as economic reasoning. Advanced Finance Theories provides modern treatments to five key areas of finance theories in Merton's collection of continuous time work, viz. portfolio selection and capital market theory, optimum consumption and intertemporal portfolio selection, option pricing theory, contingent claim analysis of corporate finance, intertemporal CAPM, and complete market general equilibrium. Where appropriate, lectures notes are supplemented by other classical text such as Ingersoll (1987) and materials on stochastic calculus.
Book Synopsis Essays on Asset Pricing with Stochastic Discount Factors by : St?phane Chr?tien
Download or read book Essays on Asset Pricing with Stochastic Discount Factors written by St?phane Chr?tien and published by LAP Lambert Academic Publishing. This book was released on 2012-02 with total page 136 pages. Available in PDF, EPUB and Kindle. Book excerpt: Many financial models are evaluated using the stochastic discount factor (SDF) approach because of its simplicity, flexibility and universality. The two essays of this work exploit these characteristics to re-examine two long-standing asset pricing topics: consumption-based and performance measurement models. The first essay develops a methodology to understand and compare the sources of pricing errors in models based on SDF moments. The method allows a new investigation of preference-based explanations of the risk-free rate, term premium and risk premium puzzles. The second essay presents a method to measure performance evaluation by developing bounds on admissible performance measures that are free from inference errors. The bounds are furthermore used in ranking mutual funds and as a diagnostic instrument for evaluating candidate performance measures. Each essay carefully establishes the empirical relevancy of the proposed methodologies. These extensions of the SDF framework provide important new insights and have numerous finance applications for academic researchers and practitioners.
Book Synopsis Stochastic Discount Factor Bounds with Conditioning Information by : Wayne E. Ferson
Download or read book Stochastic Discount Factor Bounds with Conditioning Information written by Wayne E. Ferson and published by . This book was released on 2002 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Hansen and Jagannathan (HJ, 1991) describe restrictions on the volatility of stochastic discount factors (SDFs) that price a given set of asset returns. This paper compares the sampling properties of different versions of HJ bounds that use conditioning information in the form of a given set of lagged instruments. HJ describe one way to use conditioning information. Their approach is to multiply the original returns by the lagged variables, and much of the asset pricing literature to date has followed this ihmultiplicativel. approach. We also study two versions of optimized HJ bounds with conditioning information. One is from Gallant, Hansen and Tauchen (1990) and the second is based on the unconditionally-efficient portfolios derived in Ferson and Siegel (2000). We document finite-sample biases in the HJ bounds, where the biased bounds reject asset-pricing models too often. We provide useful correction factors for the bias. We also evaluate the asymptotic standard errors for the HJ bounds, from Hansen, Heaton and Luttmer (1995)
Book Synopsis Stochastic Discounted Cash Flow by : Lutz Kruschwitz
Download or read book Stochastic Discounted Cash Flow written by Lutz Kruschwitz and published by Springer Nature. This book was released on 2020-02-28 with total page 256 pages. Available in PDF, EPUB and Kindle. Book excerpt: This open access book discusses firm valuation, which is of interest to economists, particularly those working in finance. Firm valuation comes down to the calculation of the discounted cash flow, often only referred to by its abbreviation, DCF. There are, however, different coexistent versions, which seem to compete against each other, such as entity approaches and equity approaches. Acronyms are often used, such as APV (adjusted present value) or WACC (weighted average cost of capital), two concepts classified as entity approaches. This book explains why there are several procedures and whether they lead to the same result. It also examines the economic differences between the methods and indicates the various purposes they serve. Further it describes the limits of the procedures and the situations they are best applied to. The problems this book addresses are relevant to theoreticians and practitioners alike.
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 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
Download or read book Asset Management written by Andrew Ang and published by Oxford University Press, USA. This book was released on 2014 with total page 717 pages. Available in PDF, EPUB and Kindle. Book excerpt: Stocks and bonds? Real estate? Hedge funds? Private equity? If you think those are the things to focus on in building an investment portfolio, Andrew Ang has accumulated a body of research that will prove otherwise. In this book, Ang upends the conventional wisdom about asset allocation by showing that what matters aren't asset class labels but the bundles of overlapping risks they represent.
Book Synopsis Global Stock Markets by : Wolfgang Drobetz
Download or read book Global Stock Markets written by Wolfgang Drobetz and published by Springer Science & Business Media. This book was released on 2013-06-29 with total page 346 pages. Available in PDF, EPUB and Kindle. Book excerpt: Wolfgang Drobetz provides empirical evidence on the time variation of expected stock returns over the stages of the business cycle.
Book Synopsis A Stochastic Discount Factor Approach to Asset Pricing Using Panel Data Asymptotics by : Fabio Araújo
Download or read book A Stochastic Discount Factor Approach to Asset Pricing Using Panel Data Asymptotics written by Fabio Araújo and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Stochastic Discount Factor Models of Currency Pricing by : Alexander G. Lebedinsky
Download or read book Stochastic Discount Factor Models of Currency Pricing written by Alexander G. Lebedinsky and published by . This book was released on 2004 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Stochastic Discount Factor Bounds with Conditioning Information by : Wayne E. Ferson
Download or read book Stochastic Discount Factor Bounds with Conditioning Information written by Wayne E. Ferson and published by . This book was released on 2010 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: Hansen and Jagannathan (HJ, 1991) describe restrictions on the volatility of stochastic discount factors (SDFs) that price a given set of asset returns. This paper compares the sampling properties of different versions of HJ bounds that use conditioning information in the form of a given set of lagged instruments. HJ describe one way to use conditioning information. Their approach is to multiply the original returns by the lagged variables, and much of the asset pricing literature to date has followed this ihmultiplicativel. approach. We also study two versions of optimized HJ bounds with conditioning information. One is from Gallant, Hansen and Tauchen (1990) and the second is based on the unconditionally-efficient portfolios derived in Ferson and Siegel (2000). We document finite-sample biases in the HJ bounds, where the biased bounds reject asset-pricing models too often. We provide useful correction factors for the bias. We also evaluate the asymptotic standard errors for the HJ bounds, from Hansen, Heaton and Luttmer (1995).
Book Synopsis The Stochastic Discount Factor by : Fousseni Chabi-Yo
Download or read book The Stochastic Discount Factor written by Fousseni Chabi-Yo and published by . This book was released on 2005 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Estimating the Stochastic Discount Factor Without a Utility Function by : Fabio Araujo
Download or read book Estimating the Stochastic Discount Factor Without a Utility Function written by Fabio Araujo and published by . This book was released on 2005 with total page 88 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Monotonicity of the Stochastic Discount Factor and Expected Option Returns by : Ranadeb Chaudhuri
Download or read book Monotonicity of the Stochastic Discount Factor and Expected Option Returns written by Ranadeb Chaudhuri and published by . This book was released on 2015 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical evidence shows that the pricing kernel, or stochastic discount factor (SDF), is not always downward sloping when estimated using Samp;P 500 data. On the other hand, we show that individual stock SDFs are in general downward sloping. We show that a simple jump diffusion returns model can reconcile these empirical findings. The same model also implies a steeper implied volatility curve for the index compared to the typical stock, a well-known empirical fact from the options literature. Both the SDF results and the implied-smile results can be explained by a common source of jump risk among stocks together with diversification of Brownian risk in the index. SDF violations arise when the per-unit-return compensation for Brownian risk exceeds that for jump risk. Diversification increases the former compensation more than the latter, making SDF violations more likely in the index than the typical stock. We also devise novel empirical tests of overall SDF monotonicity based on average returns of option trading strategies, thus avoiding the estimation of the density functions of returns.
Book Synopsis When Do Cross-Sectional Asset Pricing Factors Span the Stochastic Discount Factor? by : Serhiy Kozak
Download or read book When Do Cross-Sectional Asset Pricing Factors Span the Stochastic Discount Factor? written by Serhiy Kozak and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: When expected returns are linear in asset characteristics, the stochastic discount factor (SDF) that prices individual stocks can be represented as a factor model with GLS cross-sectional regression slope factors. Factors constructed heuristically by aggregating individual stocks into characteristics-based factor portfolios using sorting, characteristics-weighting, or OLS cross-sectional regression slopes do not span this SDF unless the covariance matrix of stock returns has a specific structure. These conditions are more likely satisfied when researchers use large numbers of characteristics simultaneously. Methods to hedge unpriced components of heuristic factor returns allow partial relaxation of these conditions. We also show the conditions that must hold for dimension reduction to a number of factors smaller than the number of characteristics to be possible without having to invert a large covariance matrix. Under these conditions, instrumented and projected principal components analysis methods can be implemented as simple PCA on characteristics-based portfolios.
