Empirical Evaluation of Asset Pricing Models: A Comparison of the Sdf and Beta Methods

50 Pages Posted: 26 Jan 2001 Last revised: 20 Oct 2010

See all articles by Zhenyu Wang

Zhenyu Wang

University of Texas at Austin - Department of Finance

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

Date Written: January 2001

Abstract

The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset pricing models. It has recently been pointed out that the generality of the SDF method may come at the cost of estimation efficiency. We show that there is no need for this concern. The SDF method is as efficient as the classical beta method for estimating risk premia. In addition, the SDF method has an advantage -- the classical beta method, unlike the SDF method, substantially understates the effect of sampling errors when the estimated unanticipated changes in macroeconomic variables are used as pervasive factors.

Suggested Citation

Wang, Zhenyu and Jagannathan, Ravi, Empirical Evaluation of Asset Pricing Models: A Comparison of the Sdf and Beta Methods (January 2001). NBER Working Paper No. w8098. Available at SSRN: https://ssrn.com/abstract=257837

Zhenyu Wang

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5781 (Phone)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/zhenyu.wang/

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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

Hyderabad, Gachibowli 500 019
India

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