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Assessing misspecified asset pricing models with empirical likelihood estimators

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  • Almeida, Caio
  • Garcia, René

Abstract

Hansen and Jagannathan (1997) compare misspecified asset pricing models based on least-square projections on a family of admissible stochastic discount factors. We extend their fundamental contribution by considering Minimum Discrepancy projections where misspecification is measured by a family of convex functions that take into account higher moments of asset returns. The Minimum Discrepancy problems are solved on dual spaces producing a family of estimators that captures the least-square problem as a particular case. We derive the asymptotic distributions of the estimators for the Cressie–Read family of discrepancies, and illustrate their use with an assessment of the Consumption Asset Pricing Model.

Suggested Citation

  • Almeida, Caio & Garcia, René, 2012. "Assessing misspecified asset pricing models with empirical likelihood estimators," Journal of Econometrics, Elsevier, vol. 170(2), pages 519-537.
  • Handle: RePEc:eee:econom:v:170:y:2012:i:2:p:519-537
    DOI: 10.1016/j.jeconom.2012.05.020
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    Cited by:

    1. Lee, Seojeong, 2016. "Asymptotic refinements of a misspecification-robust bootstrap for GEL estimators," Journal of Econometrics, Elsevier, vol. 192(1), pages 86-104.
    2. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2013. "Chi-squared tests for evaluation and comparison of asset pricing models," Journal of Econometrics, Elsevier, vol. 173(1), pages 108-125.
    3. Gospodinov, Nikolay & Kan, Raymond & Robotti, Cesare, 2017. "Too Good to Be True? Fallacies in Evaluating Risk Factor Models," FRB Atlanta Working Paper 2017-9, Federal Reserve Bank of Atlanta.
    4. repec:eee:intfin:v:50:y:2017:i:c:p:204-218 is not listed on IDEAS
    5. Francisco Peñaranda & Enrique Sentana, 2015. "A Unifying Approach to the Empirical Evaluation of Asset Pricing Models," The Review of Economics and Statistics, MIT Press, vol. 97(2), pages 412-435, May.
    6. Fletcher, Jonathan, 2014. "Benchmark models of expected returns in U.K. portfolio performance: An empirical investigation," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 30-46.
    7. Xiao Xiao & Chen Zhou, 2017. "Entropy-based implied moments," DNB Working Papers 581, Netherlands Central Bank, Research Department.
    8. Gagliardini, Patrick & Ronchetti, Diego, 2013. "Semi-parametric estimation of American option prices," Journal of Econometrics, Elsevier, vol. 173(1), pages 57-82.
    9. Caio Almeida & Kym Ardison & René Garcia & Jose Vicente, 2017. "Nonparametric Tail Risk, Stock Returns, and the Macroeconomy," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 15(3), pages 333-376.
    10. David le Bris & William N. Goetzmann & Sébastien Pouget, 2014. "Testing Asset Pricing Theory on Six Hundred Years of Stock Returns: Prices and Dividends for the Bazacle Company from 1372 to 1946," NBER Working Papers 20199, National Bureau of Economic Research, Inc.
    11. Gospodinov, Nikolay & Maasoumi, Esfandiar, 2017. "General Aggregation of Misspecified Asset Pricing Models," FRB Atlanta Working Paper 2017-10, Federal Reserve Bank of Atlanta.

    More about this item

    Keywords

    Stochastic discount factor; Euler equations; Generalized minimum contrast estimators; Model misspecification; Cressie–Read discrepancies;

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets

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