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Empirical Evaluation of Asset‐Pricing Models: A Comparison of the SDF and Beta Methods
Author(s) -
Jagannathan Ravi,
Wang Zhenyu
Publication year - 2002
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/1540-6261.00498
Subject(s) - generality , capital asset pricing model , stochastic discount factor , beta (programming language) , econometrics , computer science , asset (computer security) , specification , economics , management , programming language , computer security
ABSTRACT The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset‐pricing models. There have been concerns that, compared to the classical beta method, the generality of the SDF method comes at the cost of efficiency in parameter estimation and power in specification tests. We establish the correct framework for comparing the two methods and show that the SDF method is as efficient as the beta method for estimating risk premiums. Also, the specification test based on the SDF method is as powerful as the one based on the beta method.