Assessing Specification Errors in Stochastic Discount Factor Models

Lars Hansen and Ravi Jagannathan

No 153, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on x2 statistics associated with null hypothesis that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 1994-02
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Journal of Finance, Vol. 52, no. 2 (June 1997): 557-590.

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Related works:
Journal Article: Assessing Specification Errors in Stochastic Discount Factor Models (1997)
Working Paper: Assessing specification errors in stochastic discount factor models (1994)
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