Evaluating Asset Pricing Models in a Fama-French Framework
AbstractIn this work we propose a methodology to compare different stochastic discount factor (SDF) proxies based on relevant market information. The starting point is the work of Fama and French, which evidenced that the asset returns of the U.S. economy could be explained by relative factors linked to characteristics of the firms. In this sense, we construct a Monte Carlo simulation to generate a set of returns perfectly compatible with the Fama and French factors and, then, investigate the performance of different SDF proxies. Some goodness-of-fit statistics and the Hansen and Jagannathan distance are used to compare asset pricing models. An empirical application of our setup is also provided.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 175.
Date of creation: Dec 2008
Date of revision:
Contact details of provider:
Web page: http://www.bcb.gov.br/?english
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ravi Jagannathan & Zhenyu Wang, 2002.
"Empirical Evaluation of Asset-Pricing Models: A Comparison of the SDF and Beta Methods,"
Journal of Finance,
American Finance Association, vol. 57(5), pages 2337-2367, October.
- Ravi Jagannathan & Zhenyu Wang, 2001. "Empirical Evaluation of Asset Pricing Models: A Comparison of the SDF and Beta Methods," NBER Working Papers 8098, National Bureau of Economic Research, Inc.
- Araújo, Fabio & Issler, João Victor & Fernandes, Marcelo, 2005.
"Estimating the Stochastic Discount Factor without a Utility Function,"
Economics Working Papers (Ensaios Economicos da EPGE)
583, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
- Fabio Araujo & Joao Victor Issler, 2005. "Estimating the Stochastic Discount Factor without a Utility Function," Computing in Economics and Finance 2005 202, Society for Computational Economics.
- Ferson, Wayne E. & Harvey, Campbell R., 1994.
"Sources of risk and expected returns in global equity markets,"
Journal of Banking & Finance,
Elsevier, vol. 18(4), pages 775-803, September.
- Wayne E. Ferson & Campbell R. Harvey, 1994. "Sources of Risk and Expected Returns in Global Equity Markets," NBER Working Papers 4622, National Bureau of Economic Research, Inc.
- Raymond Kan & Cesare Robotti, 2009.
"Model Comparison Using the Hansen-Jagannathan Distance,"
Review of Financial Studies,
Society for Financial Studies, vol. 22(9), pages 3449-3490, September.
- Raymond Kan & Cesare Robotti, 2007. "Model comparison using the Hansen-Jagannathan distance," Working Paper 2007-04, Federal Reserve Bank of Atlanta.
- Heber Farnsworth & Wayne E. Ferson & David Jackson & Steven Todd, 2002. "Performance Evaluation with Stochastic Discount Factors," NBER Working Papers 8791, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benjamin Tabak).
If references are entirely missing, you can add them using this form.