A1559
Title: Smart stochastic discout factors
Authors: Fabio Trojani - University of Geneva, University of Turin and SFI (Switzerland) [presenting]
Alberto Quaini - Columbia University (United States)
Abstract: A novel no-arbitrage framework is proposed which exploits convex asset pricing constraints to study the properties of investors marginal utility of wealth or, more generally, Stochastic Discount Factors (SDFs). We establish a duality between minimum dispersion SDFs and suitable penalized portfolio selection problems, building the foundation for a nonparametric characterization of the feasible tradeoffs between an SDFs pricing accuracy and its comovement with systematic risks. Empirically, we find that a minimum variance correction of a CAPM SDF produces a Pareto optimal tradeoff. This Pareto optimal SDF only depends on two economically distinct risk factors: A market factor and a minimum variance excess return factor, which optimally bounds the aggregate mispricing of risks unspanned by market risk.
