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...

The risk premia assigned to economic (non-traded) risk factors can be decomposed into three parts: i) the risk premia on maximum-correlation portfolios mimicking the factors; ii) (minus) the covariance between the non-traded components of the candidate pricing kernel of a given model and the...

Under the assumption of multivariate normality of asset returns, this paper presents a geometric interpretation and the finite-sample distributions of the sample Hansen-Jagannathan bounds on the variance of admissible stochastic discount factors, with and without the nonnegativity constraint on...

Over the years, many asset pricing studies have employed the sample cross-sectional regression (CSR) R2 as a measure of model performance. We derive the asymptotic distribution of this statistic and develop associated model comparison tests, taking into account the inevitable impact of model...

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...

The risk premia assigned to economic (non-traded) risk factors can be decomposed into three parts: i) the risk premia on maximum-correlation portfolios mimicking the factors; ii) (minus) the covariance between the non-traded components of the candidate pricing kernel of a given model and the...

This paper considers two alternative formulations of the linear factor model (LFM) with nontraded factors. The first formulation is the traditional LFM, where the estimation of risk premia and alphas is performed by means of a cross-sectional regression of average returns on betas. The second...

Explaining movements in daily stock prices is one of the most difficult tasks in modern finance. This paper contributes to the existing literature by documenting the impact of geomagnetic storms on daily stock market returns. A large body of psychological research has shown that geomagnetic...