Estimating the Stochastic Discount Factor from Option Prices and Predicting the Equity Premium
Updated
Updated · arxiv.org · Jul 23
Estimating the Stochastic Discount Factor from Option Prices and Predicting the Equity Premium
1 articles · Updated · arxiv.org · Jul 23
Summary
Researchers have developed a new method to estimate the stochastic discount factor (SDF) using S&P 500 option prices and time-varying volatility.
Their approach recovers a stable, non-monotonic SDF and demonstrates superior out-of-sample predictive performance for the equity premium compared to existing benchmarks.
This advancement could improve the accuracy of risk and return forecasts, offering deeper insights into market expectations and asset pricing dynamics.