Cost minimization and the stochastic discount factor

Chambers, Robert G. and Quiggin, John (2010) Cost minimization and the stochastic discount factor. Annals of Operations Research, 176 1: 349-368. doi:10.1007/s10479-008-0469-0


Author Chambers, Robert G.
Quiggin, John
Title Cost minimization and the stochastic discount factor
Journal name Annals of Operations Research   Check publisher's open access policy
ISSN 0254-5330
1572-9338
Publication date 2010-04
Year available 2008
Sub-type Article (original research)
DOI 10.1007/s10479-008-0469-0
Volume 176
Issue 1
Start page 349
End page 368
Total pages 20
Place of publication New York, NY, U.S.A.
Publisher Springer New York LLC
Collection year 2011
Language eng
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. © 2008 Springer Science+Business Media, LLC.
Keyword Asset prices
Production
Uncertainty
Arbitrage
Stochastic returns
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ
Additional Notes Published online: 20 November 2008 From the issue entitled "The Theory and Applications of Uncertainty / Edited by Moawia Alghalith and Ardeshir Dalal"

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2011 Collection
School of Economics Publications
 
Versions
Version Filter Type
Citation counts: TR Web of Science Citation Count  Cited 0 times in Thomson Reuters Web of Science Article
Scopus Citation Count Cited 0 times in Scopus Article
Google Scholar Search Google Scholar
Created: Sun, 02 May 2010, 00:09:27 EST