Arbitrage free dispersion

We develop a theory of arbitrage-free dispersion (AFD) that characterizes the testable restrictions of asset pricing models. AFD measures Jensen's gap in the cumulant generating function of pricing kernels and returns. It implies a wide family of model-free dispersion constraints, which extend dispersion and co-dispersion bounds in the literature and are applicable with a unifying approach in multivariate and multiperiod settings. Empirically, the dispersion of stationary and martingale pricing kernel components in the benchmark long-run risk model yields a counterfactual dependence of short- vs. long-maturity bond returns and is insufficient for pricing optimal portfolios of market equity and short-term bonds