Nonparametric estimation and testing of stochastic discount factor

This paper attempts to estimate stochastic discount factor (SDF) proxies nonparametrically using the conditional Hansen-Jagannathan distance. Nonparametric estimation can not only avoid misspecification when dealing with nonlinearity in the model but also provide more precise information about the local properties of the estimators. Empirical studies show that our method performs better than the alternative parametric polynomial models, and furthermore, we find that the return on aggregate wealth can sufficiently explain the SDF proxies when one deals with nonlinearity appropriately.