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Information content of the risk-free rate for the pricing kernel bound

Author

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  • Milad Nozari

    (International Center for Finance-Yale School of Management)

Abstract

We propose a new method to tighten the restrictions on the admissible pricing kernel space. Our framework improves information-based pricing kernel bounds and can be used to test various asset pricing models. This method incorporates higher moments of asset returns and conditional information based on the possible risk-free rate fluctuations. The variation in the risk-free rate is attributed to two possible states of the economy, and the proposed approach identifies these states and improves the pricing kernel bound.

Suggested Citation

  • Milad Nozari, 2021. "Information content of the risk-free rate for the pricing kernel bound," Journal of Asset Management, Palgrave Macmillan, vol. 22(4), pages 267-276, July.
    • Handle: RePEc:pal:assmgt:v:22:y:2021:i:4:d:10.1057_s41260-021-00209-1
    DOI: 10.1057/s41260-021-00209-1
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Pricing kernel; Divergence measure; Information-theoretic bound;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G5 - Financial Economics - - Household Finance

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