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Estimation and Evaluation of Conditional Asset Pricing Models

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  • Stefan Nagel
  • Kenneth J. Singleton

Abstract

We find that several recently proposed consumption-based models of stock returns, when evaluated using an optimal set of managed portfolios and the associated model-implied conditional moment restrictions, fail to capture key features of risk premiums in equity markets. To arrive at these conclusions, we construct an optimal GMM estimator for models in which the stochastic discount factor (SDF) is a conditionally affine function of a set of priced risk factors. Further, for the (often relevant) case where a researcher is proposing a generalized SDF relative to some null model, we show that there is an optimal choice of managed portfolios to use in testing the null against the proposed alternative.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16457.

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Date of creation: Oct 2010
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Publication status: published as Stefan Nagel & Kenneth J. Singleton, 2011. "Estimation and Evaluation of Conditional Asset Pricing Models," Journal of Finance, American Finance Association, vol. 66(3), pages 873-909, 06.
Handle: RePEc:nbr:nberwo:16457

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Cited by:
  1. Manuel Arellano & Lars Peter Hansen & Enrique Sentana, 2009. "Underidentification?," Working Papers, CEMFI wp2009_0905, CEMFI.
  2. Tim Bollerslev & Viktor Todorov, 2011. "Estimation of Jump Tails," Econometrica, Econometric Society, Econometric Society, vol. 79(6), pages 1727-1783, November.
  3. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2013. "Chi-squared tests for evaluation and comparison of asset pricing models," Journal of Econometrics, Elsevier, Elsevier, vol. 173(1), pages 108-125.
  4. Gagliardini, Patrick & Ronchetti, Diego, 2013. "Semi-parametric estimation of American option prices," Journal of Econometrics, Elsevier, Elsevier, vol. 173(1), pages 57-82.
  5. Klein, Rudolf F. & Chow, Victor K., 2013. "Orthogonalized factors and systematic risk decomposition," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 53(2), pages 175-187.
  6. Nikolai Roussanov, 2010. "Composition of Wealth, Conditioning Information, and the Cross-Section of Stock Returns," NBER Working Papers, National Bureau of Economic Research, Inc 16073, National Bureau of Economic Research, Inc.
  7. Yan Li & Liangjun Su & Yuewu Xu, 2014. "A Combined Approach to the Inference of Conditional Factor Models," Working Papers, Singapore Management University, School of Economics 10-2014, Singapore Management University, School of Economics.
  8. Jaime Casassus & Freddy Higuera, 2011. "Stock Return Predictability and Oil Prices," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 406, Instituto de Economia. Pontificia Universidad Católica de Chile..
  9. Xun Lu & Liangjun Su, 2014. "Jackknife Model Averaging for Quantile Regressions," Working Papers, Singapore Management University, School of Economics 11-2014, Singapore Management University, School of Economics.
  10. Aono, Kohei & Iwaisako, Tokuo, 2013. "The consumption–wealth ratio, real estate wealth, and the Japanese stock market," Japan and the World Economy, Elsevier, Elsevier, vol. 25, pages 39-51.
  11. Kang, Hankil & Kang, Jangkoo & Lee, Changjun, 2013. "Do the production-based factors capture the time-varying patterns in stock returns?," Emerging Markets Review, Elsevier, Elsevier, vol. 15(C), pages 122-135.
  12. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, Annual Reviews, vol. 5(1), pages 167-199, November.
  13. Fletcher, Jonathan, 2014. "Benchmark models of expected returns in U.K. portfolio performance: An empirical investigation," International Review of Economics & Finance, Elsevier, Elsevier, vol. 29(C), pages 30-46.
  14. Galvani, Valentina & Gubellini, Stefano, 2013. "Mean–variance dominant trading strategies," Finance Research Letters, Elsevier, Elsevier, vol. 10(3), pages 142-150.

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