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A unifying approach to the empirical evaluation of asset pricing models
Peñaranda, Francisco; Sentana, Enrique
Universitat Pompeu Fabra. Departament d'Economia i Empresa
Two main approaches are commonly used to empirically evaluate linear factor pricingmodels: 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 estimatorssuch as continuously updated GMM yield numerically identical values for prices of risk,pricing errors, Jensen s alphas and overidentifying restrictions tests irrespective of the modelvalidity. Therefore, there is arguably a single approach regardless of the factors being tradedor not, or the use of excess or gross returns. We illustrate our results by revisiting Lustigand Verdelhan s (2007) empirical analysis of currency returns.
Finance and Accounting
Statistics, Econometrics and Quantitative Methods
factor pricing models
forward premium puzzle
generalised empirical likelihood
stochastic discount factor.
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