Using Common Features to Construct a Preference-Free Estimator of the Stochastic Discount Factor

We propose a novel estimator for the stochastic discount factor (SDF) in a panel-data context. Under general conditions it depends exclusively on appropriate averages of asset returns, and its computation is a direct exercise, as long as one has enough observations to our asymptotic results. We identify the SDF using the fact that it is the common feature in every asset return of the economy. Moreover, it does not depend on any assumptions about preferences, or on consumption data, which allows testing directly different preference specifications, as well as the existence of the equity-premium puzzle. Preliminary results are encouraging