Before revision: We introduce econometric methods to perform estimation and inference on the permanent and transitory components of the stochastic discount factor (SDF ) in dynamic Markov environments.
After revision: Stochastic discount factor (SDF) processes in dynamic economies admit a permanent-transitory decomposition in which the permanent component characterizes pricing over long investment horizons. This paper introduces econometric methods to perform estimation and inference on the permanent and transitory components of the stochastic discount factor (SDF ) in dynamic Markov environments.