Studying the Implications of Consumption and Asset Return Data for Stochastic Discount Factors in Incomplete International Economies

Gurdip Bakshi, Mario Cerrato and John Crosby

Working Papers from Business School - Economics, University of Glasgow

Abstract: We develop an incomplete markets framework to synthesize domestic and foreign stochastic discount factors (SDFs) that are consistent with limited international risk sharing. The funda- mental departure in our paper is that exchange rate growth need not equal the ratio of SDFs, and we develop a restriction that precludes “good deals” in international economies with in- complete markets. Our innovation is to study an incomplete markets problem that is consistent with SDFs that (i) are nonnegative, (ii) correctly price returns, and (iii) disallow “good deals.”

Keywords: Incomplete markets; stochastic discount factors; unspanned components; limited risk sharing (search for similar items in EconPapers)
Date: 2016-10
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2017_01

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