A Unifying Approach to the Empirical Evaluation of Asset Pricing Models

Francisco Peñaranda () and Enrique Sentana
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Francisco Peñaranda: SanFI

The Review of Economics and Statistics, 2015, vol. 97, issue 2, 412-435

Abstract: Regression and SDF approaches with centered or uncentered moments and symmetric or asymmetric normalizations are commonly used to empirically evaluate linear factor pricing models. We show that unlike two-step or iterated GMM procedures, single-step estimators such as continuously updated GMM yield numerically identical risk prices, pricing errors, and overidentifying restrictions tests irrespective of the model validity and regardless of the factors being traded, or the use of excess or gross returns. We illustrate our results with Lustig and Verdelhan’s (2007) currency returns, propose tests to detect some problematic cases, and provide Monte Carlo evidence on the reliability of asymptotic approximations. © 2015 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Keywords: regression; SDF; normalizations; linear factor; pricing models; GMM procedures; excess returns; gross returns; asymptotic approximations (search for similar items in EconPapers)
JEL-codes: B00 C00 C50 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (18)

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Related works:
Working Paper: A Unifying Approach to the Empirical Evaluation of Asset Pricing Models (2015)
Working Paper: A Unifying Approach to the Empirical Evaluation of Asset Pricing Models (2010)
Working Paper: A Unifying Approach to the Empirical Evaluation of Asset Pricing Models (2010)
Working Paper: A unifying approach to the empirical evaluation of asset pricing models (2010)
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