What Is the Consumption-CAPM Missing? An Information-Theoretic Framework for the Analysis of Asset Pricing Models

Anisha Ghosh, Christian Julliard and Alex P. Taylor

The Review of Financial Studies, 2017, vol. 30, issue 2, 442-504

Abstract: We consider asset pricing models in which the SDF can be factorized into an observable component and a potentially unobservable one. Using a relative entropy minimization approach, we nonparametrically estimate the SDF and its components. Empirically, we find the SDF has a business-cycle pattern and significant correlations with market crashes and the Fama-French factors. Moreover, we derive novel bounds for the SDF that are tighter and have higher information content than existing ones. We show that commonly used consumption-based SDFs correlate poorly with the estimated one, require high risk aversion to satisfy the bounds and understate market crash risk.Received December 19, 2012; editorial decision January 17, 2016 by Editor Pietro Veronesi.

JEL-codes: C52 G11 G12 G13 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (25)

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Working Paper: What is the Consumption-CAPM missing? An information-theoretic framework for the analysis of asset pricing models (2017)
Working Paper: What is the Consumption-CAPM missing? An information-theoretic framework for the analysis of asset pricing models (2011)
Working Paper: What is the Consumption-CAPM missing? An informative-Theoretic Framework for the Analysis of Asset Pricing Models (2011)
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