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GROWTH-OPTIMAL PORTFOLIO RESTRICTIONS ON ASSET PRICING MODELS

Published online by Cambridge University Press:  02 March 2005

RAVI BANSAL
Affiliation:
Fuqua School of Business, Duke University
BRUCE N. LEHMANN
Affiliation:
Graduate School of International Relations and Pacific Studies, University of California at San Diego

Extract

We show that absence of arbitrage in frictionless markets implies a lower bound on the average of the logarithm of the reciprocal of the stochastic discount factor implicit in asset pricing models. The greatest lower boundfor a given asset menu is the average continuously compounded return on itsgrowth-optimal portfolio. We use this bound to evaluate the plausibility ofvarious parametric asset pricing models to characterize financial marketpuzzles such as the equity premium puzzle and the risk-free ratepuzzle. We show that the insights offered by the growth-optimal boundsdiffer substantially from those obtained by other nonparametric bounds.

Information

Type
Research Article
Copyright
© 1997 Cambridge University Press

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