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A unifying approach to the empirical evaluation of asset pricing models

Francisco Peñaranda and Enrique Sentana ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: Two main approaches are commonly used to empirically evaluate linear factor pricing models: regression and SDF methods, with centred and uncentred versions of the latter. We show that unlike standard two-step or iterated GMM procedures, single-step estimators such as continuously updated GMM yield numerically identical values for prices of risk, pricing errors, Jensen’s alphas and overidentifying restrictions tests irrespective of the model validity. Therefore, there is arguably a single approach regardless of the factors being traded or not, or the use of excess or gross returns. We illustrate our results by revisiting Lustig and Verdelhan’s (2007) empirical analysis of currency returns.

Keywords: CU-GMM; Factor pricing models; Forward premium puzzle; Generalised Empirical Likelihood; Stochastic discount factor. (search for similar items in EconPapers)
JEL-codes: G11 G12 C12 C13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ore
Date: 2010-07
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Related works:
Journal Article: A Unifying Approach to the Empirical Evaluation of Asset Pricing Models (2015) Downloads
Working Paper: A Unifying Approach to the Empirical Evaluation of Asset Pricing Models (2010) Downloads
Working Paper: A Unifying Approach to the Empirical Evaluation of Asset Pricing Models (2010) Downloads
Working Paper: A Unifying Approach to the Empirical Evaluation of Asset Pricing Models (2010) Downloads
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