Empirical evaluation of overspecified asset pricing models

Elena Manresa, Francisco Peñaranda, Enrique Sentana

    Research output: Contribution to journalArticlepeer-review


    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.

    Original languageEnglish (US)
    Pages (from-to)338-351
    Number of pages14
    JournalJournal of Financial Economics
    Issue number2
    StatePublished - Feb 2023


    • Continuously updated GMM
    • Factor pricing models
    • Set estimation
    • Stochastic discount factor
    • Underidentification tests

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics
    • Strategy and Management


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