EconPapers    
Economics at your fingertips  
 

A Rehabilitation of Stochastic Discount Factor Methodology

John Cochrane

No 8533, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In a recent Journal of Finance article, Kan and Zhou (1999) find that the 'Stochastic discount factor' methodology using GMM is markedly inferior to traditional maximum likelihood even in a simple test of the static CAPM with i.i.d. normal returns. This result has gained wide attention. However, as Jagannathan and Wang (2001) point out, this result flows from a strange assumption: Kan and Zhou allow the ML estimate to know the mean market return ex-ante. I show how this information advantage explains Kan and Zhou's results. In fact, when treated symmetrically, the discount factor - GMM and traditional methodologies behave almost identically in linear i.i.d. environments.

Date: 2001-10
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.nber.org/papers/w8533.pdf (application/pdf)

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:nbr:nberwo:8533

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w8533

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2025-03-19
Handle: RePEc:nbr:nberwo:8533