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Evaluating Asset Pricing Models in a Simulated Multifactor Approach

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  • Carrasco-Gutierrez, Carlos Enrique
  • Piazza, Wagner

Abstract

In this paper a methodology to compare the performance of different stochastic discount factor (SDF) models is suggested. The starting point is the estimation of several factor models in which the choice of the fundamental factors comes from different procedures. Then, a Monte Carlo simulation is designed in order to simulate a set of gross returns with the objective of mimicking the temporal dependency and the observed covariance across gross returns. Finally, the artificial returns are used to investigate the performance of the competing asset pricing models through the Hansen & Jagannathan (1997) distance and some goodness-of-fit statistics of the pricing error. An empirical application is provided for the U.S. stock market.

Suggested Citation

  • Carrasco-Gutierrez, Carlos Enrique & Piazza, Wagner, 2011. "Evaluating Asset Pricing Models in a Simulated Multifactor Approach," MPRA Paper 66063, University Library of Munich, Germany, revised 2012.
    • Handle: RePEc:pra:mprapa:66063
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    Cited by:

    1. Carrasco Gutierrez, Carlos Enrique & Peixoto Messias, Iasmin Emillyn, 2022. "Macroeconomic factors and value and growth strategies: evidence from Brazil," MPRA Paper 114875, University Library of Munich, Germany.

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    More about this item

    Keywords

    asset pricing; stochastic discount factor; Hansen-Jagannathan distance.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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