Long-Term Risk: A Martingale Approach

DOI10.3982/ECTA13438MaRDI QIDQ4612496zbMATH OpenFDO

Authors Likuan Qin, Vadim Linetsky

Publication date 31 January 2019

Published in Econometrica (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1411.3078

zbMATH Keywords

long bondlong forward measurelong-term factorizationlong-term risk-neutral measurepricing kernelprincipal eigenfunctionstochastic discount factor

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: This paper extends the long-term factorization of the stochastic discount factor introduced and studied by Alvarez and Jermann (2005) in discretetime ergodic environments and by Hansen and Scheinkman (2009) and Hansen (2012) in Markovian environments to general semimartingale environments. The transitory component discounts at the stochastic rate of return on the long bond and is factorized into discounting at the long-term yield and a positive semimartingale that extends the principal eigenfunction of Hansen and Scheinkman (2009) to the semimartingale setting. The permanent component is a martingale that accomplishes a change of probabilities to the long forward measure, the limit of T-forward measures. The change of probabilities from the data generating to the long forward measure absorbs the long-term risk-return trade-off and interprets the latter as the long-term risk-neutral measure.

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Cited in

(17)

• Long-term factorization in Heath-Jarrow-Morton models
• Long-term factorization of affine pricing kernels
• Pricing growth-rate risk
• Dynamic programming with state-dependent discounting
• Stability of equilibrium asset pricing models: a necessary and sufficient condition
• Intertemporal preference with loss aversion: consumption and risk-attitude
• Functional Ross recovery: theoretical results and empirical tests
• Long-Term Risk: An Operator Approach
• Ergodicity, State Prices, and Long Bond Returns
• Lévy-Vasicek models and the long-bond return process
• Ross recovery with recurrent and transient processes
• Robust identification of investor beliefs
• Additive portfolio improvement and utility-efficient payoffs
• General analysis of long-term interest rates
• Long-term risk with stochastic interest rates
• Constrained Polynomial Likelihood
• A G-BSDE approach to the long-term decomposition of robust pricing kernels

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