Worcester Polytechnic Institute Electronic Theses and Dissertations Collection

Title page for ETD etd-053106-145501

Document Typethesis
Author NameKoci, Eni
TitleThe stochastic discount factor and the generalized method of moments
DepartmentMathematical Sciences
  • Luis J. Roman, Advisor
  • Keywords
  • CAPM
  • SDF
  • GMM
  • Date of Presentation/Defense2006-06-01
    Availability unrestricted


    The fundamental theorem of asset pricing in finance states that the price of any asset is its expected discounted payoff. Ideally, the payoff is discounted by a factor, which depends on parameters present in the market, and it should be unique, in the sense that financial derivatives should be able to be priced using the same discount factor. In theory, risk neutral valuation implies the existence of a positive random variable, which is called the stochastic discount factor and is used to discount the payoffs of any asset. Apart from asset pricing another use of stochastic discount factor is to evaluate the performance of the of hedge fund managers. Among many methods used to evaluate the stochastic discount factor, generalized method of moments has become very popular. In this paper we will see how generalized method of moments is used to evaluate the stochastic discount factor on linear models and the calculation of stochastic discount factor using generalized method of moments for the popular model in finance CAPM.

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