GROWTH-OPTIMAL PORTFOLIO RESTRICTIONS ON ASSET PRICING MODELS

We show that absence of arbitrage in frictionless markets implies a lower bound on the average of the logarithm of the reciprocal of the stochastic discount factor implicit in asset pricing models. The greatest lower bound for a given asset menu is the average continuously compounded return on its g...

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Veröffentlicht in:Macroeconomic dynamics 1997, Vol.1 (2), p.333-354
Hauptverfasser: BANSAL, RAVI, LEHMANN, BRUCE N.
Format: Artikel
Sprache:eng
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Zusammenfassung:We show that absence of arbitrage in frictionless markets implies a lower bound on the average of the logarithm of the reciprocal of the stochastic discount factor implicit in asset pricing models. The greatest lower bound for a given asset menu is the average continuously compounded return on its growth-optimal portfolio. We use this bound to evaluate the plausibility of various parametric asset pricing models to characterize financial market puzzles such as the equity premium puzzle and the risk-free rate puzzle. We show that the insights offered by the growth-optimal bounds differ substantially from those obtained by other nonparametric bounds.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100597003039