In this paper, we extend the results in Hansen (1982) regarding the asymptotic distribution of GMM sample moment conditions. In particular, we show that the part of the scaled sample moment conditions that gives rise to degeneracy in the asymptotic normal distribution is T-consistent and has a...

Although it is of interest to test whether or not a particular asset pricing model is literally true, a more useful task for empirical researchers is to determine how wrong a model is and to compare the performance of competing asset pricing models. In this paper, we propose a new methodology to...

Since Black, Jensen, and Scholes (1972) and Fama and MacBeth (1973), the two-pass cross-sectional regression (CSR) methodology has become the most popular approach for estimating and testing asset pricing models. Statistical inference with this method is typically conducted under the assumption...

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...

Building on the Shanken (1992) estimator, we develop a new methodology for estimating and testing beta-pricing models when a large number of assets N is available but the number of time-series observations is small. We show empirically that our large N framework can change substantially common...

Many asset pricing models include risk factors that are only weakly correlated with the asset returns. We show that in the presence of a factor that is independent of the returns ("useless factor"), the standard inference procedures for evaluating its pricing ability could be highly misleading...

We show that in misspecified models with useless factors (for example, factors that are independent of the returns on the test assets), the standard inference procedures tend to erroneously conclude, with high probability, that these irrelevant factors are priced and the restrictions of the...

This paper studies some seemingly anomalous results that arise in possibly misspecified and unidentified linear asset-pricing models estimated by maximum likelihood and one-step generalized method of moments (GMM). Strikingly, when useless factors (that is, factors that are independent of 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...