Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Department of Economics, School of Business, Economics and Law, University of Gothenburg Working Papers in Economics

No 159:
Volatility of the Stochastic Discount Factor, and the Distinction between Risk-Neutral and Objective Probability Measures

Gurdip Bakshi (), Zhiwu Chen () and Erik Hjalmarsson ()

Abstract: This paper derives a measure that characterizes the distance between the risk-neutral and the objective probability measures for any candidate asset pricing model. We formally show that the distance metric is equal to the volatility of the stochastic discount factor. This theoretical result gives an alternative interpretation to the Hansen-Jagannathan bounds: they provide a lower bound for the distance between the objective and the risk-neutral probability measures. Our empirical application provides support for the notion that the crash of 1987 has widened the wedge between the risk-neutral and the objective probability measures.

Keywords: Risk-neutral measures; objective probability measures; volatility of the stochastic discount factor; no-arbitrage; Hansen-Jagannathan bounds; (follow links to similar papers)

JEL-Codes: G10; (follow links to similar papers)

23 pages, February 2, 2005

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

2766    HTML file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Marie Andersson ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:gunwpe:0159 This page was generated on 2014-01-21 22:27:18