Assessing specification errors in stochastic discount factor models

Lars Peter Hansen, Ravi Jagannathan

Research output: Contribution to journalArticlepeer-review

342 Scopus citations


In this article 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 X2 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 our methods in assessing some alternative stochastic factor models that have been proposed in asset pricing literature.

Original languageEnglish (US)
Pages (from-to)557-590
Number of pages34
JournalJournal of Finance
Issue number2
StatePublished - Jun 1997

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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