TY - JOUR
T1 - Empirical Asset Pricing with Many Test Assets
AU - Lönn, Rasmus
AU - Schotman, Peter C.
N1 - Publisher Copyright: © 2024 The Author(s).
PY - 2024
Y1 - 2024
N2 - We formulate the problem of estimating risk prices in a stochastic discount factor (SDF) model as an instrumental variables regression. The IV estimator allows efficient estimation for models with non-traded factors and many test assets. Optimal instruments are constructed using a regularized sparse first stage regression. In a simulation study, the IV estimator is close to the infeasible GMM estimator in a setting with many assets. In an empirical application, the tracking portfolio for consumption growth appears strongly correlated with consumption news. It implies that consumption is a priced factor for the cross-section of excess equity returns. A similar regularized regression, projecting the SDF on test assets, leads to an estimate of the Hansen-Jagannathan distance, and identifies portfolios that maximally violate the pricing implications of the model.
AB - We formulate the problem of estimating risk prices in a stochastic discount factor (SDF) model as an instrumental variables regression. The IV estimator allows efficient estimation for models with non-traded factors and many test assets. Optimal instruments are constructed using a regularized sparse first stage regression. In a simulation study, the IV estimator is close to the infeasible GMM estimator in a setting with many assets. In an empirical application, the tracking portfolio for consumption growth appears strongly correlated with consumption news. It implies that consumption is a priced factor for the cross-section of excess equity returns. A similar regularized regression, projecting the SDF on test assets, leads to an estimate of the Hansen-Jagannathan distance, and identifies portfolios that maximally violate the pricing implications of the model.
UR - http://www.scopus.com/inward/record.url?scp=85210276919&partnerID=8YFLogxK
U2 - 10.1093/jjfinec/nbae002
DO - 10.1093/jjfinec/nbae002
M3 - Article
AN - SCOPUS:85210276919
SN - 1479-8409
VL - 22
SP - 1236
EP - 1263
JO - Journal of Financial Econometrics
JF - Journal of Financial Econometrics
IS - 5
ER -