Fabio Trojani (University of Geneva) on "Smart Stochastic Discount Factors"

Speaker:  Fabio Trojani - University of Geneva
  Wednesday, February 24, 2021 at 12:00 PM Zoom webinar: https://univr.zoom.us/j/88259321410
We propose a novel no-arbitrage framework, 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 SDF 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 depends on just 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.

Programme Director
Roberto Renò

Publication date
January 15, 2021