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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27108
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| Title: | Factor Risk Premia and Variance Bounds |
| Authors: | Balduzzi, Pierluigi
Kallal, Hedi |
| Issue Date: | Dec-1995 |
| Series/Report no.: | FIN-95-008 |
| Abstract: | We consider the implications for mean factor risk premia for the
variance of admissible (normalized) stochastic discount factors, or
pricing kernels. For given mean risk premia, we identify lower bounds on
the variance of the pricing kernel which exceed the variance of the
projection of the pricing kernel on the (augmented) asset return space:
the “Hansen and Jagannathan” variance bound. These lower
bounds increase with the covariability between the components of the
pricing kernel and of the factors which are not explained by asset
returns, and decrease with the distance between the factors and the
(augmented) asset-return space. As an application, we show that the
inflation risk premium generated by a consumption-based pricing kernel
implies a standard deviation of the kernel which is up to 15% higher
than the Hansen and Jagannathan bound. |
| URI: | http://hdl.handle.net/2451/27108 |
| Appears in Collections: | Finance Working Papers
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