Nonparametric stochastic discount factor decomposition

DOI10.3982/ECTA11600MaRDI QIDQ4614973zbMATH OpenOpenAlexFDO

Authors Timothy M. Christensen

Publication date 1 February 2019

Published in Econometrica (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1412.4428

zbMATH Keywords

nonparametric estimationnonparametric value function estimationpermanent-transitory decompositionsieve estimationstochastic discount factor

Mathematics Subject Classification ID

Density estimation (62G07) Applications of statistics to economics (62P20)

Abstract: Stochastic discount factor (SDF) processes in dynamic economies admit a permanent-transitory decomposition in which the permanent component characterizes pricing over long investment horizons. This paper introduces an empirical framework to analyze the permanent-transitory decomposition of SDF processes. Specifically, we show how to estimate nonparametrically the solution to the Perron-Frobenius eigenfunction problem of Hansen and Scheinkman (2009). Our empirical framework allows researchers to (i) recover the time series of the estimated permanent and transitory components and (ii) estimate the yield and the change of measure which characterize pricing over long investment horizons. We also introduce nonparametric estimators of the continuation value function in a class of models with recursive preferences by reinterpreting the value function recursion as a nonlinear Perron-Frobenius problem. We establish consistency and convergence rates of the eigenfunction estimators and asymptotic normality of the eigenvalue estimator and estimators of related functionals. As an application, we study an economy where the representative agent is endowed with recursive preferences, allowing for general (nonlinear) consumption and earnings growth dynamics.

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Cited in

(17)

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• Long-term risk with stochastic interest rates
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