 Empirical Asset Pricing with Many Test Assets*Rasmus Lönn and Peter C Schotman Journal of Financial Econometrics, 2024, vol. 22, issue 5, 1236-1263 Abstract: We formulate the problem of estimating risk prices in a stochastic discount factor (SDF) model as an instrumental variables regression. The IV estimator allows efficient estimation for models with non-traded factors and many test assets. Optimal instruments are constructed using a regularized sparse first stage regression. In a simulation study, the IV estimator is close to the infeasible GMM estimator in a setting with many assets. In an empirical application, the tracking portfolio for consumption growth appears strongly correlated with consumption news. It implies that consumption is a priced factor for the cross-section of excess equity returns. A similar regularized regression, projecting the SDF on test assets, leads to an estimate of the Hansen–Jagannathan distance, and identifies portfolios that maximally violate the pricing implications of the model. Keywords: asset pricing tests; Hansen–Jagannathan distance; instrumental variables; L2-boosting (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:jfinec:v:22:y:2024:i:5:p:1236-1263. Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Financial Econometrics is currently edited by Allan Timmermann and Fabio Trojani More articles in Journal of Financial Econometrics from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. Contact information at EDIRC. |
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