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Estimation and Evaluation of Conditional Asset Pricing Models
Author(s) -
NAGEL STEFAN,
SINGLETON KENNETH J.
Publication year - 2011
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/j.1540-6261.2011.01654.x
Subject(s) - stochastic discount factor , estimator , econometrics , generalized method of moments , capital asset pricing model , affine transformation , stock (firearms) , set (abstract data type) , mathematics , economics , computer science , actuarial science , statistics , engineering , mechanical engineering , pure mathematics , programming language
ABSTRACT 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 Generalized Method of Moments (GMM) estimator for models in which the stochastic discount factor (SDF) is a conditionally affine function of a set of priced risk factors, and we show that there is an optimal choice of managed portfolios to use in testing a null model against a proposed alternative generalized SDF.