A Critique of the Stochastic Discount Factor Methodology
Raymond Kan and
Additional contact information
Raymond Kan: University of Toronto
No 12, CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics
In this paper, we point out that the widely used stochastic discount factor (SDF) methodology ignores a fully specified model for asset returns. As a result, it suffers from two potential problems when asset returns follow a linear factor model. The first problem is that the risk premium estimate from the SDF methodology is unreliable. The second problem is that the specification test under the SDF methodology has very low power in detecting misspecified models. Traditional methodologies typically incorporate a fully specified model for asset returns, and they can perform substantially better than the SDF methodology.
Pages: 28 pages
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34) Track citations by RSS feed
Published in The Journal of Finance, August 1999, Volumn 54, Issue 4, pages 1221-1248
Downloads: (external link)
Journal Article: A Critique of the Stochastic Discount Factor Methodology (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cuf:wpaper:12
Access Statistics for this paper
More papers in CEMA Working Papers from China Economics and Management Academy, Central University of Finance and Economics Contact information at EDIRC.
Bibliographic data for series maintained by Qiang Gao ().