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Multifactor Empirical Asset Pricing Under Higher-Order Moment Variations

Author

Listed:
  • Massimo Guidolin

    (Bocconi University and IGIER, Bocconi University. Address: V1a Roetgen 1, 20136 Milan, Italy.)

  • Martin Lozano

    (University of Monterrey - UDEM, Monterrey, Mexico.)

  • Juan Arismendi Zambrano

    (Department of Economics, Finance and Accounting, Maynooth University, Ireland & ICMA Centre, Henley Business School, University of Reading, Whiteknights, Reading, United Kingdom.)

Abstract

Even though an asset pricing model can be equivalently expressed in a classical Beta or in the relatively new stochastic discount factor (SDF) representation, their key empirical features - efficiency and robustness - may differ when estimated by the generalized method of moments. Using US and UK data we find that the SDF approach is likely to be less efficient but also more robust than the Beta method. We derive the analytical asymptotic variance and show that the main drivers of this trade-off are the higher-order moments of the factors, by which skewness and covariance between returns and factors play an important role.

Suggested Citation

  • Massimo Guidolin & Martin Lozano & Juan Arismendi Zambrano, "undated". "Multifactor Empirical Asset Pricing Under Higher-Order Moment Variations," Economics Department Working Paper Series n304-20.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n304-20.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Empirical Asset Pricing; Factor Models; Higher order moments; Generalized Method of Moments; Stochastic Discount Factor; Beta pricing; Estimation efficiency.;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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