Latent variable models for stochastic discount factors (Q2771103)

A unifying analysis of latent variable models in finance is provided though the concept of stochastic discount factor (SDF). Starting with one-period securities the authors provide an extended framework with state variables to accomodate multipariod securities. Both the asset pricing factor models and the equilibrium dynamic asset pricing models are extended through a conditioning on state variables. Such conditioning enriches the dynamics of asset returns trough instanteneouis causality between the asset returns and the latent variables. The dependence of the conditional covariances on the state variables allows a rich dynamic stochastic behavior of the correlation coefficients which is important for the asset allocation or the value-at-risk strategies.NEWLINENEWLINEFor the entire collection see [Zbl 0967.91001].