Assessing Specification Errors in Stochastic Discount Factor Models

42 Pages Posted: 16 Jul 2000 Last revised: 14 Mar 2008

See all articles by Lars Peter Hansen

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 3 versions of this paper

Date Written: February 1994

Abstract

In this paper we develop alternative ways to compare asset pricing models when it is understood that their implied stochastic discount factors do not price all portfolios correctly. Unlike comparisons based on x2 statistics associated with null hypothesis that models are correct, our measures of model performance do not reward variability of discount factor proxies. One of our measures is designed to exploit fully the implications of arbitrage-free pricing of derivative claims. We demonstrate empirically the usefulness of methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature.

Suggested Citation

Hansen, Lars Peter and Jagannathan, Ravi, Assessing Specification Errors in Stochastic Discount Factor Models (February 1994). NBER Working Paper No. t0153. Available at SSRN: https://ssrn.com/abstract=225112

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Ravi Jagannathan

Northwestern University - Kellogg School of Management ( email )

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United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

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United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
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Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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