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What is the Consumption-CAPM missing? An information-theoretic framework for the analysis of asset pricing models

Ghosh, Anisha, Julliard, Christian and Taylor, Alex. P (2016) What is the Consumption-CAPM missing? An information-theoretic framework for the analysis of asset pricing models. Review of Financial Studies. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hhw075

Abstract

We consider asset pricing models in which the SDF can be factorized into an observable component and a potentially unobservable one. Using a relative entropy minimization approach, we nonparametrically estimate the SDF and its components. Empirically, we find the SDF has a business-cycle pattern and significant correlations with market crashes and the Fama-French factors. Moreover, we derive novel bounds for the SDF that are tighter and have higher information content than existing ones. We show that commonly used consumption-based SDFs correlate poorly with the estimated one, require high risk aversion to satisfy the bounds and understate market crash risk.

Item Type: Article
Official URL: http://rfs.oxfordjournals.org/
Additional Information: © 2016 The Authors
Divisions: Finance
Subjects: H Social Sciences > HG Finance
Sets: Departments > Finance
Date Deposited: 25 Jan 2016 11:51
Last Modified: 20 Oct 2019 02:21
Projects: ES/K002309/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/65131

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