Empirical evaluation of overspecified asset pricing models

Elena Manresa, Francisco Peñaranda and Enrique Sentana

Journal of Financial Economics, 2023, vol. 147, issue 2, 338-351

Abstract: Empirical asset pricing models with possibly unnecessary risk factors are increasingly common. Unfortunately, they can yield misleading statistical inferences. Unlike previous studies, we estimate the identified set of SDFs and risk prices compatible with a given model’s asset pricing restrictions. We also propose tests that detect problematic situations with economically meaningless SDFs unrelated to the test assets. Empirically, we estimate linear subspaces of SDFs compatible with popular extensions of the traditional and consumption versions of the CAPM, which are typically two-dimensional. Moreover, we often find that all the SDFs in those linear spaces are uncorrelated with the test assets’ returns.

Keywords: Continuously updated GMM; Factor pricing models; Set estimation; Stochastic discount factor; Underidentification tests (search for similar items in EconPapers)
JEL-codes: C52 G12 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Empirical Evaluation of Overspecified Asset Pricing Models (2017)
Working Paper: Empirical Evaluation of Overspecified Asset Pricing Models (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:147:y:2023:i:2:p:338-351

DOI: 10.1016/j.jfineco.2022.10.002

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