Title: Empirical evaluation of overspecified asset pricing models
Authors: Francisco Penaranda - Queens College CUNY (United States) [presenting]
Enrique Sentana - CEMFI (Spain)
Elena Manresa - MIT Slona (United States)
Abstract: Empirical asset pricing models with potentially too many risk factors are increasingly common. Unfortunately, they can yield misleading statistical inferences. Unlike other studies focusing on the properties of standard estimators and tests, we explicitly characterize the linear subspace of risk prices compatible with a given model pricing restrictions. We also propose tests to detect problematic cases such as economically meaningless SDFs uncorrelated to the chosen test assets. We conduct simulation exercises to assess the finite sample size and power of our tests. We confirm the empirical relevance of our methods by revisiting a linearized version of the consumption CAPM.