How does the law of one price hold without arbitrage?
If the law of one price holds and in the absence of arbitrage, their exists an SDF that prices all assets.
There’s lots of evidence arbitrage is very difficult. So everyone is looking for the SDF.
Even if people are crazy, as long as there’s no arbitrage, there’s an SDF. It could be a “behavioral” SDF or whatever.
It's not like anyone on Wall Street gives a s**t.I’m an asset pricing researcher and used to work on wall St. I believe my characterization is accurate: SDF is a representation of pricing. Nothing more or less.
That's tautological and just the definition of a sdf. which makes OPs point BS. It's just 1=E[SDF*returns]. Nuff said.
Now let's go back to helping mankind by pricing the fama french 25.
Love,
- AP Bro
Now
It’s a little trick to make misspecified models fit the data.This. Really weak empirical evidence but lots of brainless finance guys are stuck with it. Hard to understand
This comment does not make any sense. The SDF is a tool. How can there be weak empirical evidence for a tool?
It’s a little trick to make misspecified models fit the data.This. Really weak empirical evidence but lots of brainless finance guys are stuck with it. Hard to understand
This comment does not make any sense. The SDF is a tool. How can there be weak empirical evidence for a tool?
Details on this?