Using Common Features to Construct a Preference-Free Estimator of the Stochastic Discount Factor

Fabio Araujo and Marcelo Fernandes

No 134, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: We propose a novel estimator for the stochastic discount factor (SDF) in a panel-data context. Under general conditions it depends exclusively on appropriate averages of asset returns, and its computation is a direct exercise, as long as one has enough observations to our asymptotic results. We identify the SDF using the fact that it is the common feature in every asset return of the economy. Moreover, it does not depend on any assumptions about preferences, or on consumption data, which allows testing directly different preference specifications, as well as the existence of the equity-premium puzzle. Preliminary results are encouraging

Keywords: stochastic discount factor; panel data techniques (search for similar items in EconPapers)
JEL-codes: C33 G12 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-ecm
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