Smart Stochastic Discount Factors

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  • Fabio Trojani


  • Collegio Carlo Alberto

Date and Time

  • 03/24/2021


We propose a novel no-arbitrage framework, which exploits convex asset pricing constraints to study the properties of investors’ marginal utility of wealth or, more generally, Stochastic Discount Factors (SDFs). We establish a duality between min- imum dispersion SDFs and suitable penalized portfolio selection problems, building the foundation for a nonparametric characterization of the feasible tradeoffs between a SDF’s pricing accuracy and its comovement with systematic risks. Empirically, we find that a minimum variance correction of a CAPM–SDF produces a Pareto optimal tradeoff. This Pareto optimal SDF only depends on two economically distinct risk fac- tors: A market factor and a minimum variance excess return factor, which optimally bounds the aggregate mispricing of risks unspanned by market risk.

  • Seminars:  04/06/2021 - John Hopkins Carey Business School
  • Conferences: SoFiE Annual Meeting, Shanghi, 2019; European Annual Meeting of the Econometric Society, Manchester, 2019; Paris December Finance Meeting, 2019; European Annual Meeting of the Econometric Society, Milan, 2020; Virtual Derivatives Workshop, 2020;


  • Seminars: University of Zurich; JRC Ispra; BI Norwegian Business School; Mc Gill University; Luiss University; University of Geneva; Bocconi University; University of Verona; Imperial College Business School