Review of Financial Studies Vol. 30 No. 2 2017
What Is the Consumption-CAPM Missing? An Information-Theoretic Framework for the Analysis of Asset Pricing Models
open access
Abstract
We consider asset pricing models in which the SDF can be factorized into an observable component and a potentially unobservable one. Using a relative entropy minimization approach, we nonparametrically estimate the SDF and its components. Empirically, we find the SDF has a business-cycle pattern and significant correlations with market crashes and the Fama-French factors. Moreover, we derive novel bounds for the SDF that are tighter and have higher information content than existing ones. We show that commonly used consumption-based SDFs correlate poorly with the estimated one, require high risk aversion to satisfy the bounds and understate market crash risk. (
- DOI
- 10.1093/rfs/hhw075
- Volume
- 30
- Issue
- 2
- Pages
- 442-504
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref