Variance bounds on the permanent and transitory components of stochastic discount factors

New Entropy Restrictions and the Quest for Better Specified Asset Pricing Models

“…We further show that our entropy bounds are distinct from the bound derived in Bakshi and Chabi-Yo (2012), who focus on the variance of the permanent component of SDFs. Moreover, we derive two lower entropy bounds, which generalize the entropy bound on the SDF in Backus, Chernov, and Zin (2013).…”

“…The search is ongoing, as can be inferred from the treatments in Hansen and Scheinkman (2009), Bakshi and Chabi-Yo (2012), Hansen (2012), and Ghosh, Julliard, and Taylor (2012).…”

“…Our value-added is an entropy measure on the square of the permanent component of the SDF (Section 3), and we feature general entropy bounds (Theorem 1). These bounds are aimed at complementing the approaches in Alvarez and Jermann (2005), Bakshi and Chabi-Yo (2012), and Backus, Chernov, and Zin (2013). In the manner of Hansen andJagannathan (1991, 1997), our formalizations strive to understand model attributes, but our thrust is on the permanent component of the SDF.…”

Long-term factorization of affine pricing kernels

“…In addition to the references above, the growing literature on the long-term factorization and its applications includes Hansen and Scheinkman (2012), Hansen and Scheinkman (2017), , Borovička et al (2011), , Bakshi and Chabi-Yo (2012), Bakshi et al (2015), Christensen (2017), Christensen (2016), Qin and Linetsky (2016), Qin et al (2016), Backus et al (2015), Filipović et al (2017), Filipović et al (2016). Empirical investigations in this literature show that the martingale component in the long-term factorization is highly volatile and economically significant (see, in particular, Bakshi and Chabi-Yo (2012) for results based on pricing kernel bounds, Christensen (2017) for results based on structural asset pricing models connecting to the macro-economic fundamentals, and Qin et al (2016) for results based on explicit parameterizations of the pricing kernel, where, in particular, the relationship among the measures P, Q and L is empirically investigated).…”

The Long Bond, Long Forward Measure and Long-Term Factorization In Heath-Jarrow Morton Models

“…Empirical investigations in this literature show that the martingale M ∞ t is highly volatile and economically significant. Bakshi and Chabi-Yo (2012) provide theoretical and empirical bounds on the volatility of the martingale component. Christensen (2017) estimates the long-term factorization in a structural asset pricing model connecting to the macro-economic fundamentals.…”