Large Sample Estimators of the Stochastic Discount Factor

118 Pages Posted: 7 Mar 2018 Last revised: 18 Jan 2024

See all articles by Soohun Kim

Soohun Kim

College of Business, Korea Advanced Institute of Science and Technology (KAIST)

Robert A. Korajczyk

Northwestern University - Kellogg School of Management

Date Written: January 17, 2024

Abstract

Abstract We propose estimators of the stochastic discount factor (SDF) using large cross-sections of individual stock returns. The estimators are obtained by a simple bias-corrected cross-sectional regression. Our small-sample bias correction for short time series allows us to exploit unbalanced panels of individual stock returns, thereby reducing survivorship biases. Our estimators can accommodate prespecified traded or non-traded factors, as well as latent factors. The estimators perform well in simulations. We apply our estimators to return data for U.S. individual stocks over a 50-year sample period and identify those factors in popular asset pricing models that command significant premia. A number of proposed non-traded factors have insignificant risk premia. Contrary to many studies, we find the market factor has a significant premium, as do profitability, value, and momentum factors.

Keywords: Asset Pricing, Factor Structure, Stochastic Discount Factor, SDF, Pricing Kernel

JEL Classification: G1, G12

Suggested Citation

Kim, Soohun and Korajczyk, Robert A., Large Sample Estimators of the Stochastic Discount Factor (January 17, 2024). Available at SSRN: https://ssrn.com/abstract=3131274 or http://dx.doi.org/10.2139/ssrn.3131274

Soohun Kim (Contact Author)

College of Business, Korea Advanced Institute of Science and Technology (KAIST) ( email )

85 Hoegiro Dongdaemun-Gu
Seoul 02455
Korea, Republic of (South Korea)

Robert A. Korajczyk

Northwestern University - Kellogg School of Management ( email )

2211 Campus Drive, Room 4357
Evanston, IL 60208-0898
United States
847-491-8336 (Phone)
847-491-7781 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

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