The risk premia of linear factor models on economic (non-traded) risk factors can be decomposed into: i) the premium on maximum-correlation portfolios mimicking the factors; ii) (minus) the covariance between the non-traded components of the pricing kernel and the factors; and iii) (minus) the...

In this paper, we discuss the impact of different formulations of asset pricing models on the outcome of specification tests that are performed using excess returns. We point out that the popular way of specifying the stochastic discount factor (SDF) as a linear function of the factors is...