A stochastic discount factor approach to asset pricing using panel data

Fabio Araújo, João Issler and Marcelo Fernandes

No 628, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Using the Pricing Equation, in a panel-data framework, we construct a novel consistent estimator of the stochastic discount factor (SDF) mimicking portfolio which relies on the fact that its logarithm is the ìcommon featureîin every asset return of the economy. Our estimator is a simple function of asset returns and does not depend on any parametric function representing preferences, making it suitable for testing di§erent preference speciÖcations or investigating intertemporal substitution puzzles.

Date: 2006-11-01
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