Estimating the stochastic discount factor without a utility function

Using the Pricing Equation in a panel-data framework, we construct a novel consistent estimator of the stochastic discount factor (SDF) which relies on the fact that its logarithm is the serial-correlation ìcommon featureîin every asset return of the economy. Our estimator is a simple function of asset returns, does not depend on any parametric function representing preferences, is suitable for testing di§erent preference speciÖcations or investigating intertemporal substitution puzzles, and can be a basis to construct an estimator of the risk-free rate. For post-war data, our estimator is close to unity most of the time, yielding an average annual real discount rate of 2.46%. In formal testing, we cannot reject standard preference speciÖcations used in the literature and estimates of the relative risk-aversion coe¢ cient are between 1 and 2, and statistically equal to unity. Using our SDF estimator, we found little signs of the equity-premium puzzle for the U.S.