Cash flows discounted using a model-free SDF extracted under a yield curve prior

Artikel

We developed a model-free Bayesian extraction procedure for the stochastic discount factor under a yield curve prior. Previous methods in the literature directly or indirectly use some particular parametric asset-pricing models such as with long-run risks or habits as the prior. Here, in contrast, we used no such model, but rather, we adopted a prior that enforces external information about the historically very low levels of U.S. short- and long-term interest rates. For clarity and simplicity, our data were annual time series. We used the extracted stochastic discount factor to determine the stripped cash flow risk premiums on a panel of industrial profits and consumption. Interestingly, the results align very closely with recent limited information (bounded rationality) models of the term structure of equity risk premiums, although nowhere did we use any theory on the discount factor other than its implied moment restrictions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Journal of Risk and Financial Management ; ISSN: 1911-8074 ; Volume: 14 ; Year: 2021 ; Issue: 3 ; Pages: 1-15 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Multiple or Simultaneous Equation Models: Instrumental Variables (IV) Estimation ; Macroeconomics: Consumption, Saving, Production, Employment, and Investment: Forecasting and Simulation: Models and Applications
• Subject: yield curve ; Bayesian ; bounded rationality ; cash flows ; discounting ; moment functions ; stochastic discount factor

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gallant, A. Ronald ; Tauchen, George Eugene
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2021

Further information

• DOI: doi:10.3390/jrfm14030100
• Handle: http://hdl.handle.net/10419/239516
• Last update: 10.03.2025, 11:42 AM CET