Assessing misspecified asset pricing models with empirical likelihood estimators

Abstract

Hansen and Jagannathan (1997) compare misspecified asset pricing models based on least-square projections on a family of admissible stochastic discount factors. We extend their fundamental contribution by considering Minimum Discrepancy projections where misspecification is measured by a family of convex functions that take into account higher moments of asset returns. The Minimum Discrepancy problems are solved on dual spaces producing a family of estimators that captures the least-square problem as a particular case. We derive the asymptotic distributions of the estimators for the Cressie-Read family of discrepancies, and illustrate their use with an assessment of the Consumption Asset Pricing Model. (C) 2012 Elsevier By. All rights reserved.