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Estimation and Evaluation of Conditional Asset Pricing Models

  • Stefan Nagel
  • Kenneth J. Singleton

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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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
Note: AP
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