Macroeconomic Fluctuations and Equilibrium Discount Factors, Issues 96-118The estimation of discount factors is a central issue in empirical finance, particularly in the literature on excess volatility. In particular, it is difficult to find empirical discount factors that are volatile enough to account for fluctuations in asset prices. This paper constructs discount factors from some macroeconomic time series commonly used in empirical models of asset prices. Data for the U.S. stock market imply some evidence that discount factors relate to macroeconomic conditions, but comparison of the estimated discount factors to Hansen-Jagannathan (1991) bounds shows that the candidate discount factors cannot account for the volatility in asset returns. |
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Macroeconomic Fluctuations and Equilibrium Discount Factors Mr.Charles Frederick Kramer Limited preview - 1996 |
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absolute value arbitrage asset markets asset payoffs asset prices Autoregressive b1 PI b₁ PIt b₂ DEF b3 RTB b4 YC Bansal and Viswanathan Bounds for Discount c4 abs candidate discount factor Candidate Stochastic Discount construct a discount consumption data consumption-based model default premium denotes Descriptive statistics Dt+1 empirical equation equity premium Euler equation excess volatility expected returns fitted value GARCH model GARCH volatilities GARCH-M Hansen and Jagannathan Hansen-Jagannathan bounds Harvey and Kirby heteroskedasticity inflation intertemporal consumption-based Jagannathan 1991 linear model augmented linear representation literature macroeconomic time series macroeconomic variables models for discount models of asset orthogonality conditions P-value produce discount factors Pt+1 real Treasury bill regression risk aversion risk-free rate squared values Standard and Poor's Standard deviation statistical sense statistically significant stochastic discount factors stock returns sufficiently volatile three-month Treasury bill Treasury bill yield variance VE(h Viswanathan 1993 volatile to match volatility in asset yield curve