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KaiSqDist
KaiSqDist
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It seems like what the first equation is saying is - the return on the stochastic discount factor is equal to the zero-mean innovation to the pricing kernel discounted at the riskless rate.

I believe a good analogy to understand it is - the change/evolution in the stochastic discount factor throughout time can be attributed to a riskless $\frac{1}{1+r_f}$$1+r_f$ and a random $1+e^M_{t+1}$ component, which at least to me, makes a lot of sense.

It seems like what the first equation is saying is - the return on the stochastic discount factor is equal to the zero-mean innovation to the pricing kernel discounted at the riskless rate.

I believe a good analogy to understand it is - the change/evolution in the stochastic discount factor throughout time can be attributed to a riskless $\frac{1}{1+r_f}$ and a random $1+e^M_{t+1}$ component, which at least to me, makes a lot of sense.

It seems like what the first equation is saying is - the return on the stochastic discount factor is equal to the zero-mean innovation to the pricing kernel discounted at the riskless rate.

I believe a good analogy to understand it is - the change/evolution in the stochastic discount factor throughout time can be attributed to a riskless $1+r_f$ and a random $1+e^M_{t+1}$ component, which at least to me, makes a lot of sense.

Source Link
KaiSqDist
KaiSqDist
  • 2.2k
  • 1
  • 4
  • 18

It seems like what the first equation is saying is - the return on the stochastic discount factor is equal to the zero-mean innovation to the pricing kernel discounted at the riskless rate.

I believe a good analogy to understand it is - the change/evolution in the stochastic discount factor throughout time can be attributed to a riskless $\frac{1}{1+r_f}$ and a random $1+e^M_{t+1}$ component, which at least to me, makes a lot of sense.