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

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: Pricing kernel; stochastic discount factor; consumptionbased asset pricing; entropy bounds (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2017-02-01
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Citations: View citations in EconPapers (23)

Published in Review of Financial Studies, 1, February, 2017, 30(2), pp. 442 – 504. ISSN: 0893-9454

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Related works:
Journal Article: 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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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:65131

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