The Neuroeconomics of Financial Decisions and the Stochastic Discount Factor

2016 ◽  
Author(s):  
Terrence R. Chorvat
Keyword(s):  
Discount Factor ◽  
Stochastic Discount Factor ◽  
Financial Decisions

Hedge Fund Strategies, PerformanceDiversification: A Portfolio Theory & Stochastic Discount Factor Approach

2021 ◽  
pp. 101000
Author(s):  
David Newton ◽  
Emmanouil Platanakis ◽  
Dimitrios Stafylas ◽  
Charles Sutcliffe ◽  
Xiaoxia Ye
Keyword(s):  
Hedge Fund ◽  
Portfolio Theory ◽  
Discount Factor ◽  
Stochastic Discount Factor

THE SHARPE RATIO AND PREFERENCES: A PARAMETRIC APPROACH

2002 ◽  
Vol 6 (2) ◽  
pp. 242-265 ◽  
Author(s):  
Martin Lettau ◽  
Harald Uhlig
Keyword(s):  
Asset Pricing ◽  
Habit Formation ◽  
Market Price ◽  
Sharpe Ratio ◽  
Discount Factor ◽  
Stochastic Discount Factor ◽  
Parametric Approach ◽  
Recursive Preferences ◽  
Convenient Tool ◽  
Log Normal

We use a log-normal framework to examine the effect of preferences on the market price for risk, that is, the Sharpe ratio. In our framework, the Sharpe ratio can be calculated directly from the elasticity of the stochastic discount factor with respect to consumption innovations as well as the volatility of consumption innovations. This can be understood as an analytical shortcut to the calculation of the Hansen–Jagannathan volatility bounds, and therefore provides a convenient tool for theorists searching for models capable of explaining asset-pricing facts. To illustrate the usefulness of our approach, we examine several popular preference specifications, such as CRRA, various types of habit formation, and the recursive preferences of Epstein–Zin–Weil. Furthermore, we show how the models with idiosyncratic consumption shocks can be studied.

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