Evaluating alternative methods for testing asset pricing models with historical data

Trade-Offs Between Efficiency and Robustness in the Empirical Evaluation of Asset Pricing Models

“…Our results suggest that this similarity between the two methods only holds under very specific conditions. Once the asset pricing model under consideration includes more factors with In this sense, our results are closer to those on Kan and Zhou ([35], [33]) and Lozano and Rubio [39].…”

“…It follows that if this estimation is not accurate enough, the evaluation of the investment project will not be assertive either. For other related implications see Kan and Zhou ( [35], [33]), Jagannathan and Wang [28], and Lozano and Rubio [39].…”

“…The interest about the topic has recently risen and attracted other researchers. For example, Lozano and Rubio [39] show evidence suggesting that inference on δ and π, is more reliable than inference on their correspondent estimators λ and α. On the other hand, Sentana and Peñaranda [42] show that a particular GMM procedure gives rise to numerically identical Beta and SDF estimates.…”

“…These two SDF variants are also known as uncentred and centred respectively. The methods are then applied to estimate and evaluate the single-factor CAPM of Sharpe [45], Lintner [38] and Mossin [41]; the three factor Fama-French [16]; the four factor Carhart [10], and the three factor RUH of Lozano and Rubio [39] models in an application to US data. We also provide some illustrative results using a reduced UK sample.…”

Do industries matter in explaining stock returns and asset-pricing anomalies?

“…where f t are the models' pricing factors (see, e.g., Cochrane, 2005;Lozano and Rubio, 2011). 11 We assess the validity of an asset pricing model with Hansen's J-test, which is given as follows:…”