Measuring Time-Varying Economic Fears with Consumption-Based Stochastic Discount Factors

Stochastic Discount Factors

The valuation process that economic agents undergo for investments with uncertain payoff typically depends on their statistical views on possible future outcomes, their attitudes toward risk, and, of course, the payoff structure itself. Yields vary across different investment opportunities and their interrelations are difficult to explain. For the same agent, a different discounting factor has ...

Performance Evaluation with Stochastic Discount Factors

We study the use of stochastic discount factor (SDF) models in evaluating the investment performance of portfolio managers. By constructing artificial mutual funds with known levels of investment ability, we evaluate a large set of SDF models. We find that the measures of performance are not highly sensitive to the SDF model, and that most of the models have a mild negative bias when performanc...

How to Discount Cashflows with Time-Varying Expected Returns

While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time-varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk-free rates, predictable risk premiums, and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analy...

Markov decision processes with time-varying discount factors and random horizon

Latent Variable Models for Stochastic Discount Factors

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