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 chi-squared statistics associated with null hypotheses 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.
- C13 - Estimation: General
- E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)
- C12 - Hypothesis Testing: General
- C10 - Econometric and Statistical Methods and Methodology: General
- G10 - General Financial Markets: General (includes Measurement and Data)
- G12 - Asset Pricing; Trading Volume; Bond Interest Rates
- Federal Reserve Bank of Minneapolis. Research Department
- Federal Reserve Bank of Minneapolis
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