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GROWTH-OPTIMAL PORTFOLIO RESTRICTIONS ON ASSET PRICING MODELS

Published online by Cambridge University Press:  02 March 2005

RAVI BANSAL  and
BRUCE N. LEHMANN
RAVI BANSAL
Affiliation:
Fuqua School of Business, Duke University
BRUCE N. LEHMANN
Affiliation:
Graduate School of International Relations and Pacific Studies, University of California at San Diego
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Extract

We show that absence of arbitrage in frictionless markets implies a lower bound on the average of the logarithm of the reciprocal of the stochastic discount factor implicit in asset pricing models. The greatest lower bound for a given asset menu is the average continuously compounded return on its growth-optimal portfolio. We use this bound to evaluate the plausibility of various parametric asset pricing models to characterize financial market puzzles such as the equity premium puzzle and the risk-free rate puzzle. We show that the insights offered by the growth-optimal bounds differ substantially from those obtained by other nonparametric bounds.

Keywords

Asset Pricing ModelsGrowth-Optimal PortfolioLower BoundNonparametric Bounds
Type
Research Article
Information
Macroeconomic Dynamics , Volume 1 , Issue 2 , June 1997 , pp. 333 - 354
Copyright
© 1997 Cambridge University Press

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