Abstract
The essential element in modern asset pricing theory is a positive random variable called ‘the stochastic discount factor’ (SDF). This object allows one to price any payoff stream. Its existence is implied by the absence of arbitrage opportunities. Consumption-based asset pricing models link the SDF to the marginal utility growth of investors – and in turn to observable economic variables – and in doing so they provide empirical content to asset pricing theory. This article discusses this class of models.
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Guvenen, F., Lustig, H. (2018). Consumption-Based Asset Pricing Models (Theory). In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2279
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DOI: https://doi.org/10.1057/978-1-349-95189-5_2279
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