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Evaluating Asset Pricing Models in a Simulated Multifactor Approach

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  • Carlos Enrique Carrasco-Gutierrez

    (Universidade Católica de Brasília)

  • Wagner Piazza Gaglianone

    (Banco Central do Brasil)

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 and 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

  • Carlos Enrique Carrasco-Gutierrez & Wagner Piazza Gaglianone, 2012. "Evaluating Asset Pricing Models in a Simulated Multifactor Approach," Brazilian Review of Finance, Brazilian Society of Finance, vol. 10(4), pages 425-460.
    • Handle: RePEc:brf:journl:v:10:y:2012:i:4:p:425-460
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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
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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