Estimation and Evaluation of Conditional Asset Pricing Models
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.
We are grateful to seminar participants at Baruch College, the Berkeley-Stanford joint finance seminar, London Business School, Northwestern University, Princeton University, UC San Diego, the National Bureau of Economic Research, and the Western Finance Association Meetings, as well as to Fousseni Chabi-Yo, Wayne Ferson, Lars Hansen, the Editor, and two anonymous referees, for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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. citation courtesy of