Empirical evaluation of asset-pricing models: A comparison of the SDF and beta methods

Ravi Jagannathan, Zhenyu Wang

Research output: Contribution to journalArticlepeer-review

49 Scopus citations

Abstract

The stochastic discount factor (SDF) method provides a unified general framework for econometric analysis of asset-pricing models. There have been concerns that, compared to the classical beta method, the generality of the SDF method comes at the cost of efficiency in parameter estimation and power in specification tests. We establish the correct framework for comparing the two methods and show that the SDF method is as efficient as the beta method for estimating risk premiums. Also, the specification test based on the SDF method is as powerful as the one based on the beta method.

Original languageEnglish (US)
Pages (from-to)2337-2367
Number of pages31
JournalJournal of Finance
Volume57
Issue number5
DOIs
StatePublished - 2002

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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