Empirical evaluation of asset pricing models: Arbitrage and pricing errors over contingent claims

Arbeitspapier

Hansen and Jagannathan (1997) have developed two measures of pricing errors for asset pricing models: the maximum pricing error in all static portfolios of the test assets and the maximum pricing error in all contingent claims of the assets. In this paper, we develop simulation-based Bayesian inference for these measures. While the literature reports that the time-varying extensions substantially reduce pricing errors of classic models on the standard test assets, our analysis shows that the reduction is much smaller based on the second measure. Those time-varying models have pricing errors on the contingent claims of the test assets because their stochastic discount factors are often negative and admit arbitrage opportunities.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 265

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Bayesian inference, asset pricing, pricing errors, model comparison, contingent claims ; Capital Asset Pricing Model ; Arbitragegeschäft ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Wang, Zhenyu ; Zhang, Xiaoyan
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/60554
• Last update: 10.03.2025, 11:44 AM CET