Volatility of the Stochastic Discount Factor, and the Distinction between Risk-Neutral and Objective Probability Measures

Gurdip Bakshi (), Zhiwu Chen and Erik Hjalmarsson
Additional contact information
Gurdip Bakshi: Smith School of Business, Postal: University of Maryland, College Park, MD 20742

No 159, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: This paper derives a measure that characterizes the distance between the risk-neutral and the objective probability measures for any candidate asset pricing model. We formally show that the distance metric is equal to the volatility of the stochastic discount factor. This theoretical result gives an alternative interpretation to the Hansen-Jagannathan bounds: they provide a lower bound for the distance between the objective and the risk-neutral probability measures. Our empirical application provides support for the notion that the crash of 1987 has widened the wedge between the risk-neutral and the objective probability measures.

Keywords: Risk-neutral measures; objective probability measures; volatility of the stochastic discount factor; no-arbitrage; Hansen-Jagannathan bounds (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2005-02-02
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/2077/2766 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:gunwpe:0159

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers in Economics from University of Gothenburg, Department of Economics Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Jessica Oscarsson ().