Evaluating alternative methods for testing asset pricing models with historical data

Martín Carlos Lozano Banda; Gonzalo Rubio

doi:http://dx.doi.org/10.1016/j.jempfin.2010.05.005

Evaluating alternative methods for testing asset pricing models with historical data

Martín Carlos Lozano Banda, Gonzalo Rubio

Departamento de Contabilidad, Finanzas y Economía

Research output: Contribution to journal › Article › peer-review

8 Citations (Scopus)

Abstract

We follow the correct Jagannathan and Wang (2002) framework for comparing the estimates and specification tests of the classical Beta and Stochastic Discount Factor/Generalized Method of Moments (SDF/GMM) methods. We extend previous studies by considering not only single but also multifactor models, and by taking into account some of the prescriptions for improving empirical tests suggested by Lewellen, Nagel and Shanken (2010). Our results reveal that SDF/GMM first-stage estimators lead to lower pricing errors than OLS, while SDF/GMM second stage estimators display higher pricing errors than the classical Beta GLS method. While Jagannathan and Wang (2002), and Cochrane (2005) conclude that there are no differences when estimating and testing by the Beta and SDF/GMM methods for the CAPM, we show that their conclusion cannot be extensible for multifactor models. Moreover, the Beta methods (OLS and GLS) seem to dominate the SDF/GMM (first and second stages) procedure in terms of estimators' properties. These results are consistent across benchmark portfolios and sample periods.

Original language	English
Pages (from-to)	136–146
Number of pages	11
Journal	Journal of Empirical Finance
Volume	18
Issue number	1
DOIs	https://doi.org/10.1016/j.jempfin.2010.05.005
Publication status	Published - Jan 2011

Bibliographical note

Funding Information:
The authors thank participants in the XV Foro de Finanzas at Universidad Islas Baleares, and especially Belén Nieto, Rosa Rodríguez and Miguel A. Martínez for helpful comments and suggestions, and seminar participants at Universidad del País Vasco. We are especially indebted to an anonymous referee for his thoughtful suggestions which greatly improved the paper. Martín Lozano acknowledges financial support from Consolidate Research Team 9/UPV-00038.321-15094/2001 and Gonzalo Rubio acknowledges financial support from Generalitat Valenciana grant PROMETEO/2008/106 , and Ministerio de Ciencia e Innovación grant MEC ECO2008-03058/ECON .

Copyright:
Copyright 2010 Elsevier B.V., All rights reserved.

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

Access to Document

http://dx.doi.org/10.1016/j.jempfin.2010.05.005

Cite this

@article{5859a903a071401e8a7b18ef64544d79,

title = "Evaluating alternative methods for testing asset pricing models with historical data",

abstract = "We follow the correct Jagannathan and Wang (2002) framework for comparing the estimates and specification tests of the classical Beta and Stochastic Discount Factor/Generalized Method of Moments (SDF/GMM) methods. We extend previous studies by considering not only single but also multifactor models, and by taking into account some of the prescriptions for improving empirical tests suggested by Lewellen, Nagel and Shanken (2010). Our results reveal that SDF/GMM first-stage estimators lead to lower pricing errors than OLS, while SDF/GMM second stage estimators display higher pricing errors than the classical Beta GLS method. While Jagannathan and Wang (2002), and Cochrane (2005) conclude that there are no differences when estimating and testing by the Beta and SDF/GMM methods for the CAPM, we show that their conclusion cannot be extensible for multifactor models. Moreover, the Beta methods (OLS and GLS) seem to dominate the SDF/GMM (first and second stages) procedure in terms of estimators' properties. These results are consistent across benchmark portfolios and sample periods.",

author = "{Lozano Banda}, {Mart{\'i}n Carlos} and Gonzalo Rubio",

note = "Funding Information: The authors thank participants in the XV Foro de Finanzas at Universidad Islas Baleares, and especially Bel{\'e}n Nieto, Rosa Rodr{\'i}guez and Miguel A. Mart{\'i}nez for helpful comments and suggestions, and seminar participants at Universidad del Pa{\'i}s Vasco. We are especially indebted to an anonymous referee for his thoughtful suggestions which greatly improved the paper. Mart{\'i}n Lozano acknowledges financial support from Consolidate Research Team 9/UPV-00038.321-15094/2001 and Gonzalo Rubio acknowledges financial support from Generalitat Valenciana grant PROMETEO/2008/106 , and Ministerio de Ciencia e Innovaci{\'o}n grant MEC ECO2008-03058/ECON . Copyright: Copyright 2010 Elsevier B.V., All rights reserved.",

year = "2011",

month = jan,

doi = "http://dx.doi.org/10.1016/j.jempfin.2010.05.005",

language = "English",

volume = "18",

pages = "136–146",

journal = "Journal of Empirical Finance",

issn = "0927-5398",

publisher = "Elsevier",

number = "1",

}

TY - JOUR

T1 - Evaluating alternative methods for testing asset pricing models with historical data

AU - Lozano Banda, Martín Carlos

AU - Rubio, Gonzalo

N1 - Funding Information: The authors thank participants in the XV Foro de Finanzas at Universidad Islas Baleares, and especially Belén Nieto, Rosa Rodríguez and Miguel A. Martínez for helpful comments and suggestions, and seminar participants at Universidad del País Vasco. We are especially indebted to an anonymous referee for his thoughtful suggestions which greatly improved the paper. Martín Lozano acknowledges financial support from Consolidate Research Team 9/UPV-00038.321-15094/2001 and Gonzalo Rubio acknowledges financial support from Generalitat Valenciana grant PROMETEO/2008/106 , and Ministerio de Ciencia e Innovación grant MEC ECO2008-03058/ECON . Copyright: Copyright 2010 Elsevier B.V., All rights reserved.

PY - 2011/1

Y1 - 2011/1

N2 - We follow the correct Jagannathan and Wang (2002) framework for comparing the estimates and specification tests of the classical Beta and Stochastic Discount Factor/Generalized Method of Moments (SDF/GMM) methods. We extend previous studies by considering not only single but also multifactor models, and by taking into account some of the prescriptions for improving empirical tests suggested by Lewellen, Nagel and Shanken (2010). Our results reveal that SDF/GMM first-stage estimators lead to lower pricing errors than OLS, while SDF/GMM second stage estimators display higher pricing errors than the classical Beta GLS method. While Jagannathan and Wang (2002), and Cochrane (2005) conclude that there are no differences when estimating and testing by the Beta and SDF/GMM methods for the CAPM, we show that their conclusion cannot be extensible for multifactor models. Moreover, the Beta methods (OLS and GLS) seem to dominate the SDF/GMM (first and second stages) procedure in terms of estimators' properties. These results are consistent across benchmark portfolios and sample periods.

AB - We follow the correct Jagannathan and Wang (2002) framework for comparing the estimates and specification tests of the classical Beta and Stochastic Discount Factor/Generalized Method of Moments (SDF/GMM) methods. We extend previous studies by considering not only single but also multifactor models, and by taking into account some of the prescriptions for improving empirical tests suggested by Lewellen, Nagel and Shanken (2010). Our results reveal that SDF/GMM first-stage estimators lead to lower pricing errors than OLS, while SDF/GMM second stage estimators display higher pricing errors than the classical Beta GLS method. While Jagannathan and Wang (2002), and Cochrane (2005) conclude that there are no differences when estimating and testing by the Beta and SDF/GMM methods for the CAPM, we show that their conclusion cannot be extensible for multifactor models. Moreover, the Beta methods (OLS and GLS) seem to dominate the SDF/GMM (first and second stages) procedure in terms of estimators' properties. These results are consistent across benchmark portfolios and sample periods.

UR - http://www.scopus.com/inward/record.url?scp=78650514177&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=78650514177&partnerID=8YFLogxK

UR - https://www.mendeley.com/catalogue/579d25ad-b075-32de-8d01-5bd3b6b840da/

U2 - http://dx.doi.org/10.1016/j.jempfin.2010.05.005

DO - http://dx.doi.org/10.1016/j.jempfin.2010.05.005

M3 - Article

SN - 0927-5398

VL - 18

SP - 136

EP - 146

JO - Journal of Empirical Finance

JF - Journal of Empirical Finance

IS - 1

ER -

Evaluating alternative methods for testing asset pricing models with historical data

Abstract

Bibliographical note

All Science Journal Classification (ASJC) codes

Access to Document

Other files and links

Fingerprint

Cite this