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Econometric Evaluation of Asset Pricing Models

Staff Report 206 | Published January 1, 1996

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Econometric Evaluation of Asset Pricing Models


We provide a brief review of the techniques that are based on the Generalized Method of Moments (GMM) and used for evaluating capital asset pricing models. We first develop the CAPM and multi-beta models and discuss the classical two-stage regression method originally used to evaluate them. We then describe the pricing kernel representation of a generic asset pricing model; this representation facilitates use of the GMM in a natural way for evaluating the conditional and unconditional versions of most asset pricing models. We also discuss diagnostic methods that provide additional insights.

Published in: _Handbook of Statistics_ (Vol. 14, 1996, pp. 1-33)