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Cost minimization and the stochastic discount factor.
- Source :
- Annals of Operations Research; Apr2010, Vol. 176 Issue 1, p349-368, 20p, 3 Diagrams, 2 Charts
- Publication Year :
- 2010
-
Abstract
- It is shown that a cost function subject to internal costs of adjustment induces a stochastic discount factor (pricing kernel) that is a function of random output, input and output prices, existing capital stock, and investment. The only assumption on firm preferences is that they are increasing in current period consumption and future stochastic consumption. This ensures that the firm will always act to minimize current period cost of providing future consumption, and it is the first-order conditions for this cost minimization problem that generate the stochastic discount factor, which itself can be interpreted as the marginal variable cost of varying stochastic output. A cost-based pricing kernel is estimated using annual time-series data on macroeconomic variables and returns data for the S&P 500 and commercial paper. [ABSTRACT FROM AUTHOR]
- Subjects :
- ASSETS (Accounting)
PRICES
COST
CAPITAL stock
INVESTMENTS
STOCHASTIC analysis
Subjects
Details
- Language :
- English
- ISSN :
- 02545330
- Volume :
- 176
- Issue :
- 1
- Database :
- Complementary Index
- Journal :
- Annals of Operations Research
- Publication Type :
- Academic Journal
- Accession number :
- 48586627
- Full Text :
- https://doi.org/10.1007/s10479-008-0469-0