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Assessing specification errors in stochastic discount factor models
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DOI：10.1111/j.1540-6261.1997.tb04813.x.png)
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Abstract
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In this article we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on chi(2) statistics associated with null hypotheses that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of our methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature.
Keywords:
ASSET PRICING-MODELS
EMPIRICAL TESTS
ARBITRAGE
CONSUMPTION
MARKETS
SUBSTITUTION
PERSISTENCE
ESTIMATORS
VOLATILITY
VALUATION
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