TY - JOUR
T1 - Empirical evaluation of overspecified asset pricing models
AU - Manresa, Elena
AU - Peñaranda, Francisco
AU - Sentana, Enrique
N1 - Funding Information:
☆ We would like to thank Craig Burnside, Cesare Robotti and Motohiro Yogo for kindly making their data available to us. We also thank Cesare Robotti, Enrique Salvador, Dacheng Xiu, participants at the Finance Forum (Zaragoza), the Midwest Finance Association Meeting (Chicago), the UK MMF Workshop on “Empirical Modelling of Financial Markets” (Brunel), the annual SoFiE Conference (Aarhus), the Computational and Financial Econometrics Conferences (Seville and London), the SanFI “New Methods for the Empirical Analysis of Financial Markets” Conference (Comillas), the Econometric Society World Congress (Montreal), Asian Meetings (Xiamen), North American and European Virtual Summer Meetings, the Spanish Economic Association Symposium (Alicante), the Virtual Workshop on Financial Econometrics (Durham), as well as audiences at CEU Cardenal Herrera (Elche), Chicago, Fundação Getulio Vargas (Rio), Geneva, Harvard Business School, LSE, McCombs School of Business (Austin), Queens College CUNY and Yale for helpful comments and suggestions. We also thank an anonymous referee and the associate editor for very valuable feedback. Of course, the usual caveat applies. Financial support from the Spanish Government through grant 2014–59262 (Sentana) is gratefully acknowledged. The second and third authors are also very grateful to SanFI and the Santander CEMFI Research Chair in Finance, respectively, for their funding.
Funding Information:
We would like to thank Craig Burnside, Cesare Robotti and Motohiro Yogo for kindly making their data available to us. We also thank Cesare Robotti, Enrique Salvador, Dacheng Xiu, participants at the Finance Forum (Zaragoza), the Midwest Finance Association Meeting (Chicago), the UK MMF Workshop on “Empirical Modelling of Financial Markets” (Brunel), the annual SoFiE Conference (Aarhus), the Computational and Financial Econometrics Conferences (Seville and London), the SanFI “New Methods for the Empirical Analysis of Financial Markets” Conference (Comillas), the Econometric Society World Congress (Montreal), Asian Meetings (Xiamen), North American and European Virtual Summer Meetings, the Spanish Economic Association Symposium (Alicante), the Virtual Workshop on Financial Econometrics (Durham), as well as audiences at CEU Cardenal Herrera (Elche), Chicago, Fundação Getulio Vargas (Rio), Geneva, Harvard Business School, LSE, McCombs School of Business (Austin), Queens College CUNY and Yale for helpful comments and suggestions. We also thank an anonymous referee and the associate editor for very valuable feedback. Of course, the usual caveat applies. Financial support from the Spanish Government through grant 2014–59262 (Sentana) is gratefully acknowledged. The second and third authors are also very grateful to SanFI and the Santander CEMFI Research Chair in Finance, respectively, for their funding.
Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2023/2
Y1 - 2023/2
N2 - 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.
AB - 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.
KW - Continuously updated GMM
KW - Factor pricing models
KW - Set estimation
KW - Stochastic discount factor
KW - Underidentification tests
UR - http://www.scopus.com/inward/record.url?scp=85143484461&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85143484461&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2022.10.002
DO - 10.1016/j.jfineco.2022.10.002
M3 - Article
AN - SCOPUS:85143484461
SN - 0304-405X
VL - 147
SP - 338
EP - 351
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -