A unifying approach to the empirical evaluation of asset pricing models
2010
Two main approaches are commonly used to empirically evaluate linear factor pricing
models: regression and SDF methods, with centred and uncentred versions of the
latter. We show that unlike standard two-step or iterated GMM procedures, single-step
estimators such as continuously updated GMM yield numerically identical values for
prices of risk, pricing errors, Jensen�s alphas and overidentifying restrictions tests
irrespective of the model validity. Therefore, there is arguably a single approach
regardless of the factors being traded or not, or the use of excess or gross returns. We
illustrate our results by revisiting Lustig and Verdelhan�s (2007) empirical analysis of
currency returns.
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