The stochastic discount factor differs whether it is estimated with only the most liquid stocks from the one estimated with the whole sample in some years in Mexico and Chile in the period 2006 to 2012. This is evidence that there is a liquidity premium associated with stocks in these countries

When the market is incomplete, a new non-redundant derivative security cannot be priced by no-arbitrage arguments alone. Moreover, there will be a multiplicity of stochastic discount factors and each of them may give a different price for the new derivative security. This paper develops an approach

financial support from the Pigott-PACCAR professorship at the University of Washington. Previous drafts of the this paper were entitled, " Conditional Performance Evaluation." Performance Evaluation with Stochastic Discount Factors This paper uses a general asset pricing

In this entry we characterize pricing kernels or stochastic discount factors that are used to represent valuation operators in dynamic stochastic economies. A kernel is commonly-used mathematical term used to represent an operator. The term stochastic discount factor extends concepts from economics

Abstract Discount factors are used to discount the cash flows in swap valuation. In my thesis, we study in the two swap valuation methods, the different performances of the discount factors. We lay the foundation for the swap valuation in the first four chapters. We introduce the concepts

Using Campbell’s (1991) unexpected return decomposition, the impli-cations of the Rational Valuation Formula are derived in terms of unconditional volatility of discount factors, given conditional return vola-tility and hence given the volatility of unexpected returns. This provides a bound

This paper uses the stochastic discount factor (SDF) to price real options and introduces the expected discounted shortfall (EDS) risk measure to control risk. A multivariate covariance based SDF modelling framework is described. Explicit formulae linking the correlation matrix to the risk premium

and their interrelations are difficult to explain. For the same agent, a different discounting factor has to be used for every separate valuation occasion. If, however, one is ready to accept discounting that varies randomly with the possible outcomes, and therefore accepts the concept of a stochastic discountfactor

In this paper, we point out that the widely used stochastic discount factor (SDF) methodology ignores a fully specified model for asset returns. As a result, it suffers from two potential problems when asset returns follow a linear factor model. The first problem is that risk premium estimate from

The properties of the SDF are described in detail in Pástor and Veronesi (2005; PV). This appendix contains a brief summary. The process in equation (10) implies a normal unconditional distribution for yt with mean y and variance σ2y/2ky. Let yD = y − 4σy/ 2ky and yU = y +