Hostname: page-component-8448b6f56d-t5pn6 Total loading time: 0 Render date: 2024-04-24T10:09:30.663Z Has data issue: false hasContentIssue false
  • English
  • Français

PRICING KERNEL ESTIMATION: A LOCAL ESTIMATING EQUATION APPROACH

Published online by Cambridge University Press:  27 October 2014

Zongwu Cai ,
Yu Ren  and
Linman Sun
Zongwu Cai*
Affiliation:
University of Kansas and Xiamen University
Yu Ren*
Affiliation:
Xiamen University
Linman Sun
Affiliation:
Wells Fargo Bank
*
*Address correspondence to Zongwu Cai, Department of Economics, University of Kansas, Lawrence, KS 66045, USA and The Wang Yanan Institute for Studies in Economics and Fujian Key Laboratory of Statistical Science, Xiamen University, Xiamen, Fujian 361005, China; e-mail: zongwucai@gmail.com.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper investigates a general semiparametric stochastic discount factor formulation that avoids functional form misspecification. A new semiparametric estimation procedure is proposed which combines orthogonality conditions and local linear fitting to give a semiparametric generalized estimating equation approach. Asymptotic properties of the estimators are established and we explore the empirical usefulness of the proposed approach to value-weighted stock returns.

Type
ARTICLES
Information
Econometric Theory , Volume 31 , Issue 3 , June 2015 , pp. 560 - 580
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors would like to thank the editor, Professor Peter C.B. Phillips, the co-editor, Professor Oliver Linton, and the anonymous referees for their comments. Cai’s research was supported, in part, by the National Nature Science Foundation of China Grants #71131008 (Key Project), #70871003, and #70971113. Ren’s research was supported by a Natural Science Foundation of Fujian Province Grant (#2011J01384), the Fundamental Research Funds for the Central Universities (#2013221022), and the Natural Science Foundation of China Grants (#71301135, #71203189, #71131008).

References

REFERENCES

Akdeniz, L., Altay-Salih, A., & Caner, M. (2003) Time-varying betas help in asset pricing: The threshold CAPM. Studies in Nonlinear Dynamics & Econometrics 6(4), Article 1.Google Scholar
Altonji, J. & Segal, L. (1996) Small-sample bias in GMM estimation of covariance structures. Journal of Business & Economic Statistics 14, 353–366.Google Scholar
Ang, A. & Liu, J. (2004) How to discount cashflows with time-varying expected return. Journal of Finance 59, 2745–2783.CrossRefGoogle Scholar
Bansal, R., Hsieh, D.A., & Viswanathan, S. (1993) A new approach to international arbitrage pricing. Journal of Finance 48, 1719–1747.CrossRefGoogle Scholar
Bansal, R. & Viswanathan, S. (1993) No arbitrage and arbitrage pricing: A new approach. Journal of Finance 47, 1231–1262.CrossRefGoogle Scholar
Cai, Z. (2002) Regression quantiles for time series data. Econometric Theory 18, 169–192.CrossRefGoogle Scholar
Cai, Z. (2003) Nonparametric estimation equations for time series data. Statistics and Probability Letters 62, 379–390.CrossRefGoogle Scholar
Cai, Z. & Li, Q. (2008) Nonparametric estimation of varying coefficient dynamic panel models. Econometric Theory 24, 1321–1342.CrossRefGoogle Scholar
Carrasco, M. & Chen, X. (2002) Mixing and moment properties of various GARCH and stochastic volatility models. Econometric Theory 18, 17–39.CrossRefGoogle Scholar
Carrol, R., Ruppert, D., & Welsh, A. (1998) Local estimating equations. Journal of the American Statistical Association 93, 214–227.CrossRefGoogle Scholar
Chen, X., Favilukis, J., & Ludvigson, S. (2012) An Estimation of Economic Models with Recursive Preferences. Working paper, New York University.CrossRefGoogle Scholar
Chen, X. & Ludvigson, S. (2009) Land of addicts? An empirical investigation of habit-based asset pricing models. Journal of Applied Econometrics 24, 1057–1093.Google Scholar
Chen, S.X. & Tang, C.Y. (2005) Nonparametric inference of value at risk for dependent financial returns. Journal of Financial Econometrics 3, 227–255.CrossRefGoogle Scholar
Cho, Y.-H. & Engle, R.F. (2000) Time-varying Betas and Asymmetric Effects of News: Empirical Analysis of Blue Chip Stocks. Working paper, New York University.CrossRefGoogle Scholar
Cochrane, J.H. (1996) A cross-sectional test of an investment-based asset pricing model. Journal of Political Economy 104, 572–621.CrossRefGoogle Scholar
Cochrane, J.H. (2001) Asset Pricing. Princeton University Press.Google Scholar
Dittmar, R. (2002) Nonlinear pricing kernels, kurtosis preference, and evidence from the cross section of equity returns. Journal of Finance 57, 369–403.CrossRefGoogle Scholar
Dumas, B. & Solnik, B. (1995) The world price of foreign exchange rate risk. Journal of Finance 50, 445–479.CrossRefGoogle Scholar
Escanciano, J.-C. & Hoderlein, S. (2010) Nonparametric Identification of Euler Equations. Working paper, Boston College.Google Scholar
Fama, E. & French, K.R. (1993) Common risk factors in the returns on bonds and stocks. Journal of Financial Economics 33, 3–56.CrossRefGoogle Scholar
Fan, J. & Gijbels, I. (1996) Local Polynomial Modelling and Its Applications. Chapman and Hall.Google Scholar
Fang, Y., Ren, Y., & Yuan, Y. (2011) Nonparametric estimation and testing of stochastic discount factor. Finance Research Letters 8, 196–205.CrossRefGoogle Scholar
Ferson, W.E. (1989) Changes in expected security returns, risk and the level of interest rates. Journal of Finance 44, 1191–1214.Google Scholar
Ferson, W.E. & Harvey, C.R. (1991) The variation of economic risk premiums. Journal of Political Economy 99, 385–415.CrossRefGoogle Scholar
Ferson, W.E. & Harvey, C.R. (1993) The risk and predictability of international equity returns. Journal of Financial Studies 6, 527–566.CrossRefGoogle Scholar
Ferson, W.E. & Harvey, C.R. (1998) Fundamental determinants of national equity market returns: A perspective on conditional asset pricing. Journal of Banking and Finance 21, 1625–1665.Google Scholar
Ferson, W.E. & Harvey, C.R. (1999) Conditional variables and the cross section of stock return. Journal of Finance 54, 1325–1360.CrossRefGoogle Scholar
Ferson, W.E. & Korajczyk, R.A. (1995) Do arbitrage pricing models explain the predictability of stock returns? Journal of Business 68, 309–349.CrossRefGoogle Scholar
Fraser, P., Hamelink, F., Hoesli, M., & MacGregor, B. (2004) Time-varying betas and cross-sectional return-risk relation: Evidence from the UK. European Journal of Finance 10, 255–276.CrossRefGoogle Scholar
Gagliardini, P., Ossola, E., & Scaillet, O. (2011) Time-varying risk premia in large cross-sectional equity datasets. Swiss Finance Institute Research Paper No. 11–40.CrossRefGoogle Scholar
Ghysels, E. (1998) On stable factor structures in the pricing of risk: Do time varying betas help or hurt? Journal of Finance 53, 549–573.CrossRefGoogle Scholar
Gourieroux, C. & Monfort, A. (2007) Econometric specification of stochastic discount factor models. Journal of Econometrics 136, 509–530.CrossRefGoogle Scholar
Hall, P. & Heyde, C.C. (1980) Martingale Limit Theory and Its Applications. Academic Press.Google Scholar
Hamilton, J.D. (1994) Time Series Analysis. Princeton University Press.Google Scholar
Hansen, L.P. (1982) Large sample properties of the generalized method of moments estimators. Econometrica 50, 1029–1054.CrossRefGoogle Scholar
Harvey, C.R. (1989) Time-varying conditional covariances in tests of asset pricing models. Journal of Financial Economics 24, 289–317.Google Scholar
Jagannathan, R. & Wang, Z. (1996) The conditional CAPM and the cross-section of expected returns. Journal of Finance 51, 3–53.CrossRefGoogle Scholar
Jagannathan, R. & Wang, Z. (2002) Empirical evaluation of asset pricing models: A comparison of the SDF and beta methods. Journal of Finance 57, 2337–2367.CrossRefGoogle Scholar
Lewbel, A., Linton, O., & Srisuma, S. (2011) Nonparametric Euler Equation Identification and Estimation. Working paper, Boston College.Google Scholar
Reyes, M.G. (1999) Size, time-varying beta, and conditional heteroscedasticity in UK stock return. Review of Financial Economics 8, 1–10.CrossRefGoogle Scholar
Shao, Q. & Yu, H. (1996) Weak convergence for weighted empirical processes of dependent sequences. Annals of Probability 24, 2098–2127.Google Scholar
Volkonskii, V.A. & Rozanov, Yu.A. (1959) Some limit theorems for random functions I. Theory of Probability and Its Applications 4, 178–197.CrossRefGoogle Scholar
Wang, K.Q. (2002) Nonparametric tests of conditional mean-variance efficiency of a benchmark portfolio. Journal of Empirical Finance 9, 133–169.CrossRefGoogle Scholar
Wang, K.Q. (2003) Asset pricing with conditioning information: A new test. Journal of Finance 58, 161–196.CrossRefGoogle Scholar