TY  - JOUR
AU  - Hodrick,Robert J.
AU  - Zhang,Xiaoyan
TI  - Evaluating the Specification Errors of Asset Pricing Models
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7661
PY  - 2000
Y2  - April 2000
UR  - http://www.nber.org/papers/w7661
L1  - http://www.nber.org/papers/w7661.pdf
N1  - Author contact info:
Robert J. Hodrick
Graduate School of Business
Columbia University
3022 Broadway
New York, NY 10027
Tel: 212/854-3413
Fax: 212/316-9219
E-Mail: rh169@columbia.edu

Xiaoyan Zhang
Johnson Graduate School of Management
366 Sage Hall
Cornell University
Ithaca, NY 14853
Tel: 607/255-8729
E-Mail: xz69@cornell.edu
AB  - This paper examines the specification errors of several asset pricing models using the methodology of Hansen and Jagannathan (1997) and a common data set.  The models are the CAPM, the Consumption CAPM, the Jagannathan and Wang (1996) conditional CAPM, the Campbell (1996) dynamic asset pricing model, the Cochrane (1996) production-based model, and the Fama-French (1993) three-factor and five-factor models.  We use returns on the Fama-French twenty-five portfolios sorted by size and book-to-market ratio and the risk-free rate as our test assets. The sample is 1952 to 1997.  We allow the parameters of the models' pricing kernels to fluctuate with the business cycle which we measure in two ways.  One uses the Hodrick-Prescott (1997) filter applied to either industrial production for monthly models or real GNP for quarterly models.  The second approach for quarterly models uses the consumption-wealth measure developed by Lettau and Ludvigson (1999).  While we cannot reject correct pricing for Campbell's model, a stability test indicates that the parameters may not be stable.  None of the models correctly prices returns that are scaled by the term premium.
ER  -