The efficiency of the SDF and Beta methods at evaluating multi-factor asset-pricing models

Martín Carlos Lozano Banda, Stuart Hyde, Ian Garrett

Resultado de la investigación

Resumen

The classical beta method and the stochastic discount factor (SDF) method may be
considered competing paradigms for empirical work in asset pricing. The two methods are equally efficient at estimating risk premiums in the context of the single-factor model. We show this does not hold for multi-factor models. Inference is consistently more reliable in the Beta method for the estimates in models which include size, value and momentum factors. However, our evidence also illustrates that the SDF method is generally more efficient at estimating sample pricing errors. Finally, the specification test in the Beta method tends to under-reject in finite samples while the SDF method has approximately the correct size. Our Monte Carlo simulation results are consistent whether we use a normal or empirical distribution, or different sets and sizes of tests portfolios.
Idioma originalEnglish
EstadoPublished - 1 ene 2009
EventoSouthwestern Finance Association : 48th Annual Meeting Proceedings - Oklahoma City
Duración: 1 ene 20098 ene 2009
Número de conferencia: 48th Annual Meeting

Conference

ConferenceSouthwestern Finance Association
Título abreviadoSWFA
PaísUnited States
CiudadOklahoma City
Período1/1/098/1/09

Huella dactilar

Stochastic discount factor
Multifactor asset pricing model
Monte Carlo simulation
Factors
Empirical distribution
Pricing errors
Paradigm
Specification test
Inference
Normal distribution
Multifactor model
Asset pricing
Momentum
Finite sample
Risk premium

Citar esto

Lozano Banda, M. C., Hyde, S., & Garrett, I. (2009). The efficiency of the SDF and Beta methods at evaluating multi-factor asset-pricing models. Papel presentado en Southwestern Finance Association , Oklahoma City, .
Lozano Banda, Martín Carlos ; Hyde, Stuart ; Garrett, Ian. / The efficiency of the SDF and Beta methods at evaluating multi-factor asset-pricing models. Papel presentado en Southwestern Finance Association , Oklahoma City, .
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abstract = "The classical beta method and the stochastic discount factor (SDF) method may beconsidered competing paradigms for empirical work in asset pricing. The two methods are equally efficient at estimating risk premiums in the context of the single-factor model. We show this does not hold for multi-factor models. Inference is consistently more reliable in the Beta method for the estimates in models which include size, value and momentum factors. However, our evidence also illustrates that the SDF method is generally more efficient at estimating sample pricing errors. Finally, the specification test in the Beta method tends to under-reject in finite samples while the SDF method has approximately the correct size. Our Monte Carlo simulation results are consistent whether we use a normal or empirical distribution, or different sets and sizes of tests portfolios.",
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Lozano Banda, MC, Hyde, S & Garrett, I 2009, 'The efficiency of the SDF and Beta methods at evaluating multi-factor asset-pricing models' Papel presentado en, Oklahoma City, 1/1/09 - 8/1/09, .

The efficiency of the SDF and Beta methods at evaluating multi-factor asset-pricing models. / Lozano Banda, Martín Carlos; Hyde, Stuart; Garrett, Ian.

2009. Papel presentado en Southwestern Finance Association , Oklahoma City, .

Resultado de la investigación

TY - CONF

T1 - The efficiency of the SDF and Beta methods at evaluating multi-factor asset-pricing models

AU - Lozano Banda, Martín Carlos

AU - Hyde, Stuart

AU - Garrett, Ian

PY - 2009/1/1

Y1 - 2009/1/1

N2 - The classical beta method and the stochastic discount factor (SDF) method may beconsidered competing paradigms for empirical work in asset pricing. The two methods are equally efficient at estimating risk premiums in the context of the single-factor model. We show this does not hold for multi-factor models. Inference is consistently more reliable in the Beta method for the estimates in models which include size, value and momentum factors. However, our evidence also illustrates that the SDF method is generally more efficient at estimating sample pricing errors. Finally, the specification test in the Beta method tends to under-reject in finite samples while the SDF method has approximately the correct size. Our Monte Carlo simulation results are consistent whether we use a normal or empirical distribution, or different sets and sizes of tests portfolios.

AB - The classical beta method and the stochastic discount factor (SDF) method may beconsidered competing paradigms for empirical work in asset pricing. The two methods are equally efficient at estimating risk premiums in the context of the single-factor model. We show this does not hold for multi-factor models. Inference is consistently more reliable in the Beta method for the estimates in models which include size, value and momentum factors. However, our evidence also illustrates that the SDF method is generally more efficient at estimating sample pricing errors. Finally, the specification test in the Beta method tends to under-reject in finite samples while the SDF method has approximately the correct size. Our Monte Carlo simulation results are consistent whether we use a normal or empirical distribution, or different sets and sizes of tests portfolios.

M3 - Paper

ER -

Lozano Banda MC, Hyde S, Garrett I. The efficiency of the SDF and Beta methods at evaluating multi-factor asset-pricing models. 2009. Papel presentado en Southwestern Finance Association , Oklahoma City, .