A frequency decomposition of approximation errors in stochastic discount factor models

Timothy Cogley

    Research output: Contribution to journalArticle

    Abstract

    This article extends the work of Hansen and Jagannathan by showing how to decompose approximation errors in stochastic discount factor models by frequency. This decomposition is applied to a number of consumption-based discount factor models in order to investigate how well they fit at low frequencies. There is some evidence of improved fit at low frequencies, but only in models with high degrees of risk aversion. In models with low degrees of risk aversion, approximation errors at low frequencies are just as severe as those at high frequencies.

    Original languageEnglish (US)
    Pages (from-to)473-503
    Number of pages31
    JournalInternational Economic Review
    Volume42
    Issue number2
    StatePublished - 2001

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    Decomposition
    Stochastic discount factor
    Approximation error
    Risk aversion
    Discount factor

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    A frequency decomposition of approximation errors in stochastic discount factor models. / Cogley, Timothy.

    In: International Economic Review, Vol. 42, No. 2, 2001, p. 473-503.

    Research output: Contribution to journalArticle

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