Empirical Evaluation of Overspecified Asset Pricing Models

Elena Manresa (), Francisco Peñaranda () and Enrique Sentana
Additional contact information
Elena Manresa: MIT Sloan, http://www.mit.edu/
Francisco Peñaranda: Queens College CUNY, http://www.qc.cuny.edu

Working Papers from CEMFI

Abstract: Asset pricing models with potentially too many risk factors are increasingly common in empirical work. Unfortunately, they can yield misleading statistical inferences. Unlike other studies focusing on the properties of standard estimators and tests, we estimate the sets of SDFs and risk prices compatible with the asset pricing restrictions of a given model. We also propose tests to detect problematic situations with economically meaningless SDFs uncorrelated to the test assets. We confirm the empirical relevance of our proposed estimators and tests with Yogo's (2006) linearized version of the consumption CAPM, and provide Monte Carlo evidence on their reliability in finite samples.

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: 2017-05
New Economics Papers: this item is included in nep-ecm and nep-ore
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Empirical evaluation of overspecified asset pricing models (2023)
Working Paper: Empirical Evaluation of Overspecified Asset Pricing Models (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2017_1711

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